 "C P Gurnani")
With improving growth in communications and manufacturing businesses as well as with profitability of LCC (a company acquired recently) expected to scale up, Tech Mahindra's margins are expected to improve. The company posted healthy results for the quarter ended March 2016. In a free-wheeling chat with Sheetal Agarwal, C P Gurnani, managing director and chief executive officer, Tech Mahindra, talks about the road ahead, impact of Brexit and digitisation. Edited Excerpts:
FY16 was tough for your communications business. Do you think FY17 will be better?
A lot of investments are coming back in communications business. One, the world over investments in 5G 19fifth generation) have started happening. Two, I think the whole wave of mergers and acquisitions and consolidation is behind us right now. Three, many telecom service providers are refocusing their energies. We have seen one communications provider getting into health care, one investing in sports and media and so on. In my view, the industry is now ready for the next phase. And, when they become ready they obviously need a technology partner and that is where Tech Mahindra has a good chance.
Is the strong growth in BFSI (banking, financial services and insurance) sustainable? What is the outlook on manufacturing?
We acquired Sofgen in BFSI a year ago. It is now leading us into core banking solutions and is one of the drivers of our growth. Our investment in fintech is another big driver of growth. Both of them are showing results and I hope we continue on that trajectory.
In manufacturing, engineering services has done very well. When we start delivering synergies in our Pininfarina acquisition, we will start doing well in manufacturing. We are also open to making further investments in engineering services.
You believe margins will be better in FY17 versus FY16. What will drive these gains?
I am talking on a year-to-year basis, and I’m very clear that some quarters may not be as exciting as we would like them to be because of challenges. The reason I am now feeling confident is I think LCC acquisition will towards the end (of FY17) will start contributing to higher margins. Pininfarina will be a work-in-progress, but I think our operating efficiencies and some changes in our product portfolio should be able to compensate for that.
Will be there be any impact of Brexit on the company?
I am keeping my fingers crossed. I watch the news carefully, watch every statement of people like British Prime Minister David Cameron. I hope they stay together, because their exit has a potential consequence on the economy, international trade and we are not isolated. If they chose to separate, there may not be a direct business impact, but there will be a currency impact. The un-hedged part of currency will feel some heat. We will have to take it on the chin and keep moving forward.
Digitisation was 12 per cent of your revenues in FY16. How much will it grow in FY17?
Digital will scale up to 25 per cent in FY17. I believe digitisation of the economy is here to stay. It will become continuous, closer to the customer and deliver solutions in real time.
What is the scope of improvement in utilisation rate and revenue per employee?
Our utilisation rate can go up to 82-83 per cent from 80 per cent currently. But there are certain quarters when fresher hiring takes place, which become productive only after six months. BPO business forms 30 per cent of our manpower. So our average revenue per employee will always be lower than peers because of high concentration of the BPO business. We will be net positive in hiring. But we will be retraining, retoolling and investing a lot more to keep us future ready.
Starting April 1 2016, Tech Mahindra has adopted Ind AS accounting standard. What will be the impact of this transition?
One impact will be on ESOP accounting, which will now be on a fair value basis as against intrinsic value basis so far. So the cost could go up approximately by $8 million in FY17. We have some treasury stocks that were created at the time of merger of Satyam. We will have to net off these shares while reporting our numbers. So it will improve reported EPS by 10 per cent as the share base will decrease. These will be two areas of major impact.
