Bangalore: Mid-sized technology company MindTree Ltd spent its first decade pitching itself as an IT services firm offering focused consultancy and intellectual property-led services. Now, the Bangalore firm is tweaking its business model for steadier revenue from long-term but comparatively low-end work such as maintenance and testing.
The global slowdown has made that necessary. End-to-end product engineering and research and development services have taken a hit in the past year as clients cut their spending on high-end technology, said an executive at MindTree.
“Necessarily, in our case, we are dependent more on end-and-end (product engineering) projects, which in a slowdown tend to be under pressure more than maintenance,” said Krishnakumar Natarajan, one of MindTree’s 10 co-founders.
For the 51-year-old Natarajan, one of the firm’s younger co-founders, the immediate task is to reorient the mid-tier player to achieve the ambitious target of $1 billion (Rs4,870 crore) in revenue in five years—a target another co-founder and chairman Ashok Soota set in April when Natarajan took over as chief executive and managing director.
That’ll take time, Natarajan said. “Over a period of time, we will be able to manage a mix of 50-55% (revenue from) what one would call end-to-end projects, (and) around 45% from annuity-based work. But we are still a long way towards that—at least a couple of years to reach that.”
MindTree currently earns only 24% of its annual revenue from annuity businesses, or long-term projects. The firm is now looking to generate more business through long-term contracts for infrastructure management and technical support, independent testing and its newly formed knowledge services outsourcing operations.
The $1 billion target is now the roost of top-league technology firms. And MindTree, as it completes its first decade, is struggling to come out of a “mid-size” trap. Soota had earlier set that target for 2012, but had to push it by two years in the wake of the downturn. Even with the additional years, moving up the rung could prove a steep climb. Then, $1 billion in 2014 may not be what it is in 2009.
MindTree grew at around 30% between 2005-06 and 2007-08. In 2008-09, its revenue surged nearly 63% to Rs1,237 crore, but this was aided by business from Aztecsoft Ltd, the product engineering firm it acquired in May 2008. Excluding that, revenue rose a modest 18% and net profit halved to Rs52.31 crore.
To reach its $1 billion target, MindTree will have to grow at an average 20% at least over the next five years—an ambitious target at a time when other mid-sized firms such as Patni Computer Systems Ltd see annual growth at a modest 8.4%.
Nasscom, a software lobby, has predicted that India’s technology services industry will grow this fiscal year at 4-7%, the slowest in nearly a decade, as customers in the US and Europe cut technology budgets. The sector grew at an average 30% for six years till 2007-08 and in 2008-09 by around 16.3% to $46.3 billion by revenue.
In July, MindTree cut its revenue forecast for 2009-10 by 4-7% to $255-270 million—its third such cut in nine quarters —citing an uncertain business climate. The firm lost business from two large revenue customers, CIT Group Inc., a US financial services firm, and Getronics NV, a European IT firm. Together, these firms fetched MindTree $20 million in 2008-09, about 8% of the company’s overall sales.
“MindTree’s smaller size and significant discretionary component of revenues does make its revenues more volatile,” analysts Bhuvnesh Singh and Sunil Tirumalai of brokerage Credit Suisse Securities India Pvt. Ltd said in a 22 July note. “On the other hand, we believe that an improving environment could also lead to a larger surprise in revenues.”
Natarajan aims to position MindTree above other mid-rung companies such as Pune-based Patni, Chennai’s Polaris Software Labs Ltd and Bangalore’s Sonata Software Ltd, and just below tier-I companies such as Tata Consultancy Services Ltd, Infosys Technologies Ltd or Wipro Ltd. “We will never be an Infosys or Wipro, which probably have 70-80% business from maintenance and sustenance, which gives them more predictability even in time of slowdown,” he said.
Also in MindTree’s favour is the pedigree of its management team. The firm was started in 1999 by a team of professionals from India’s third largest software exporter, Wipro, telecom equipment firm Lucent Technologies Inc., now merged with Alcatel, and consulting firm Cambridge Technologies Partners.
The team was led by Soota, who was then heading Wipro Infotech, the firm’s technology arm; he brought with him five other executives from Wipro. “When you start with a great team, I think there is more external expectations that you do everything quick-time. But what you realize at the end of the day is building an institution is not a thing that you can compress in time,” said Natarajan.
MindTree shares have climbed 96% so far this year, far outpacing the Bombay Stock Exchange’s benchmark Sensex’s 52% jump. The stock ended Wednesday nearly flat at Rs460.95, while the Sensex declined 1.5%, to 14,809.64.