9 min read.Updated: 11 Feb 2021, 05:47 AM ISTGoutam Das
Partly derailed by the pandemic, the L&T group company is thinking big to steer itself back on the growth track
Many see a merger of L&T’s four tech firms in the future. Also, the pressure on CEO Chatterjee to deliver is telling; he not only has to better his peers but also compete with group companies.
NEW DELHI :
Around 2005, IT firm Mindtree bagged Microsoft as a customer, for a one-off project worth not more than $250,000. Over the next one and a half decades, rainmakers at Mindtree mined the account to make it the company’s No.1 client. The Microsoft account generated nearly 29% of the company’s revenues in the quarter ending December 2020, up from about 20% two years ago. And now, there is growing unease, at least among equity analysts.
Last year, on 15 October, the words “top client" were mentioned 24 times during an analyst call, arranged after Mindtree declared its September quarter results. More recently, on 22 January, “top client" featured 16 times during a similar call.
“Does the strong relationship with the top client hamper our growth prospects with the competing hyper scalers (Amazon and Google) in any manner?" one analyst asked. “How many decision makers (in Microsoft) are we (Mindtree) dealing with?" another questioned. “With the exception of the top client, most of the numbers look down (growth has been slow)," yet another analyst mentioned, asking what could sustain the revenue momentum, going ahead.
This is a tough quiz for Mindtree’s management as it braces up to steer the company, partly derailed by the pandemic, back on the growth track. The company’s revenues from travel and hospitality customers halved, leading to an underperformance in the first nine months of 2020-21 as compared to industry peers.
Revenues from Microsoft, nevertheless, jumped 22% in the December quarter from the year-ago period. The problem: big isn’t always beautiful when it comes to de-risking. Best-in-class companies, such as Infosys, generate 11% of its revenues from their top five customers.
Mindtree, meanwhile, is in the middle of implementing a new strategy under a new management and new owners. The company started in 1999; its founders exited the management after Larsen and Toubro Ltd (L&T) completed a hostile takeover in June 2019.
The founders put up a spirited resistance but couldn’t find a buyer to mop up the 20% stake V.G. Siddhartha, the former promoter of Cafe Coffee Day group, held in Mindtree. L&T seized the moment.
Current CEO and managing director Debashis Chatterjee joined in August 2019 from Cognizant, India’s second-largest IT exporter. When he walked in, the company was in the middle of significant turmoil because of the loss of leadership. “After establishing stability in the business, our focus has shifted to revenue acceleration and operational resilience," Chatterjee said during a recent interaction with Mint. “We have moved from an EBITDA margin band of 10% about 16 months ago to 23.1% in the last quarter. This has been a result of forward planning and disciplined execution," he added.
Chatterjee’s strategy will be tested on many more counts than just profitability. Besides de-risking from Microsoft, he has to differentiate Mindtree from rivals, bag bigger deals, expand into geographies such as Europe, and build new business verticals. In short, push Mindtree to the next league that justifies L&T’s acquisition. L&T wants to be a mover and shaker in the Indian IT industry but today, even with four tech companies in the group, it hasn’t tickled the pecking order much.
L&T group companies—L&T Infotech ($1.5 bn), Mindtree (over $1 bn) and L&T Technology Services ($786 mn)—jointly add up to $3.4 billion in revenues, making it the seventh in the pecking order, behind Tech Mahindra. L&T’s fourth firm, L&T-NxT, is working on emerging digital technologies; its revenues aren’t known.
In the first nine months of 2020-21, L&T Infotech has grown 10% versus Mindtree’s de-growth of 3%. For L&T group to catch up with Tech Mahindra and shake up the pecking order, it is imperative that Mindtree fires sooner than later. The question is: can it fire?
The good news is the worst appears to be behind Mindtree and Chaterjee’s good job on margins has impressed company watchers. “Going ahead, margins are likely to be stable as the firm looks to enter an investment phase to kick start growth," Mohit Jain, an analyst with Anand Rathi, a financial services firm, said.
Jain appeared confident Mindtree can claw back to be counted among the top quadrant of IT payers in terms of growth by 2021-22. “Despite headwinds, Mindtree finds a way to match up to the industry growth rates. 2020-21 is a classic example with 1% revenue decline estimated when the travel vertical (17% of revenues pre-pandemic) have halved," he said.
The leadership team Chatterjee hired over the last six months hold the key—in terms of setting a new performance culture, hard selling the firm, and delivery.
A bigger mindset
Between 2002 and 2011, Debashis Chatterjee was the global head of Cognizant’s banking and financial services unit. Under him, Cognizant bagged what many in the company thought was a risky project — building a derivatives trading exchange platform for the National Stock Exchange of India (NSE). Cognizant had no experience in building such a platform before and needed some of its best employees on the job.
“He has an uncanny ability to identify key people and surround himself with them," Aan Chauhan, CTO, L&T-NxT, and formerly from Cognizant, said.
A few years before the NSE project, Chaterjee started beefing up the technology teams and hired Chauhan. “He pushed me hard to set up a team around me. By the time NSE happened, we had 35-40 senior people who could take the problem head on," Chauhan said. Cognizant delivered the project successfully and NSE today runs the world’s largest derivatives exchange (by contracts traded).
Chaterjee’s “uncanny ability" is at work in Mindtree now. He has surrounded himself with a leadership team hired from Cognizant, of course, but also from companies such as Accenture. At the senior vice president/vice president levels, about 16 people have joined Mindtree recently, data from professional networking site LinkedIn showed. Nine of them have had stints with Cognizant in the past.
“Mindtree has become ‘Cogni-tree’. It is a common industry joke," an executive from a rival company said, smirking.
The hires do serve a purpose; they know a bit or two about scaling. After all, Cognizant adds four Mindtrees in one quarter (in the third quarter of 2020, Cognizant clocked revenues of $4.2 billion). Chatterjee’s big idea appears to be grafting the big company mindset onto Mindtree.
One of his recent hires is Venu Lambu who joined as executive director and president of Global Markets. In his previous avatar, he was a member of Cognizant’s leadership team. One of his challenges, he told this writer over a Zoom call from London, was creating the belief that even smaller companies can win large deals.
“It is about creating the belief that in the good old IT world, the point of differentiation was only size," he explained. A company with 100,000 employees could easily trample a company with 20,000 employees even five years ago. “Now, it is a story about platforms, automation, AI, cloud. That negates a lot of size and scale you associate with the labour population," he added.
In November, Mindtree inked a five-year deal with European wind turbine manufacturer The Nordex Group. Such successes instil that confidence.
A new strategy
Why are large deals so important? The answer lies in data and within 30km of Mindtree’s beautiful campus in Bengaluru’s Global Village, which weaves around a rivulet.
Around 2004, Infosys had hit a revenue run rate of a billion dollars, the same size as today’s Mindtree. In terms of business, however, the company had three $50 million clients. By the time Infosys tripled to $3 billion, in 2006-07, it had a dozen $50 million clients and three $100 million accounts. At $6 billion, in 2010-11, Infosys had eleven $100-million accounts and two $200 million ones.
Once a company cracks the code of growing an account to $100-200 million, the ability to replicate that success is high with other customers, Infosys demonstrated. Companies who couldn’t crack that code have remained small. Mindtree has struggled to grow faster because it has fared poorly at such conversion. The company has one client that generates $100 million in annual revenues and just one $50-million account.
“Confronted with persistent problems in delivery, account and programme management, most large customers have capped the scope of work they give Mindtree. In some cases, the comfort level stops at just $8-10 million, in other cases $15 million," Peter Schumacher, president, CEO and founder of Value Leadership Group, an executive management consulting firm, said. “Over the years, the losses in revenue these caps represent has been staggering," he added.
Debashis Chatterjee’s “big mindset" strategy fits in here. He has chalked out four service lines that can sell to different parts of an organisation, in a more cohesive fashion. Once upon a time, IT firms mostly sold to the chief information officer (CIO) but digital transformation projects require selling to multiple stakeholders. The service lines include ‘customer success’, where stuff like digital marketing and commerce solutions are offered; ‘data and intelligence’, ‘cloud’ and ‘enterprise IT’.
“In the old Mindtree, we sold services like testing or application maintenance. Now, by having these four service lines you are participating in a client’s digital transformation journey front-end to back-end," Chatterjee said.
In customer success, services are sold to the chief marketing officer; in data and intelligence, the chief digital officer is the buyer whereas the CIO typically decides on cloud and the traditional enterprise IT projects. Selling to many stakeholders implies larger accounts over a period of time. “The solutions we can do at the intersection of these four service lines—that is what will differentiate ourselves. The strategy is well understood by our clients, analysts and employees. Now, it is all about executing," Chatterjee said.
As Mindtree executes, there is one lingering question. Does it make sense for L&T to run its four tech companies independently? Many, including Mindtree’s founders, see an imminent merger sometime in the future.
As of now, the group companies appear to be collaborating on a few projects. “Mindtree and us are two independent companies, we do different balance sheets. On the business side, if there is an opportunity, we will collaborate," Keshab Panda, MD & CEO of L&T Technology Services, which provides engineering and R&D services, said. “When we bid, 75-80% of the work can be engineering but there might be 20% work on the enterprise IT side. We work together to submit a common proposal," he explained.
Nonetheless, the pressure on Chatterjee to deliver is telling. He not only has to better his peers but compete with the group companies as well. “L&T is looking at him very sharply. It is a great thing for L&T; they have three CEOs competing for scale. DC (Chatterjee) is under pressure to grow Mindtree faster than L&T Infotech," an executive from a rival firm said.
Since the buck stops with numbers, this writer asked Chatterjee how long it could take to double Mindtree’s revenues? For its first billion, the company took two decades. “It will definitely take less than 20 years," he replied. “It’s a factor of overall market dynamics, of the foundation you lay to ride the momentum. We are doing everything to set the foundation right."