Amid falling revenue from Hewett-Packard, promoter and largest client, Mphasis, the mid-size information technology (IT) services company, has posted a fourth consecutive quarter of year-on-year decline in net profit, for the period ending January. Yet, Chief Executive Officer Ganesh Ayyar remains optimistic the transformation it embarked on 18 months earlier has started to pay back and the coming 12 months would be stronger than the previous 12. Edited excerpts of a talk with Itika Sharma Punit:
Despite several efforts, Mphasis’ net profit has continued to decline, for a fourth consecutive quarter.
You cannot look at the net profit number in isolation. The fact is our tax rates are changing and we are investing more into sales because we believe that only if you do so will you grow. So, to asses the inherent health of a services business, I personally believe the gross margin is a better data point to look at, and that has improved by 100 basis points over the year.
Should we expect more quarters of lower profits?
We intend that at the Ebit (earnings before interest and tax) level, we would be delivering 15-18 per cent growth. We are investing in sales and solutioning and will continue to do so. I don’t think these investments are at the cost of the bottom line because if I don’t invest in sales, I am delivering higher margins now but forsaking the future of my shareholders.
What is the reason for the exceptional loss you booked in this quarter?
We don’t want to be in the infrastructure government business in India, as it has been a drag on our revenues and profits over four quarters. We are in the process of selling a few contracts in that space. The size of the business is significantly small, less than five per cent of our revenue. We have been working diligently to exit that business and what you are seeing is the culmination of that action. This would ensure the drag would come down significantly in the coming quarters. All the employees on these projects are external and contractual, so there is no concern on that front. This is just a one-time loss and would not re-occur.
The rumours around HP selling stake in Mphasis have been around for long. Is there any update?
Some of the rumours are the height of ridiculousness. For people who believe these rumours, anything we do would seem that we are heading towards a stake sale. But I have been absolutely candid that I am not aware of anything on this. Probably the media knows a lot more than I do. But, I don’t believe the media in this aspect. I am as honest as it can get and I don’t know what else to say. How can I prove it is not happening?
Have there been concerns about these rumours among employees and clients?
The employees and a majority of our clients are not worried about it. Whenever there’s a news item in the media, employees are curious to know if there’s any substance behind it and to that extent, they ask questions. When the media hype reaches a crescendo, some customers ask that question. But I am not aware of any upheaval in the customer base or employees as a result of this. There is absolutely no impact of these rumours on attrition.
How is your relationship with HP as a promoter?
Absolutely fantastic. Facts like our new identity, our new mission statement, and the fact that we are turning the ship by investing in select areas should tell you we have applied a strategy completely backed by our promoter. These strategies have unanimously been voted for by our board, which has HP-nominated members, too.
How about HP as a client?
Our relationship with HP as our largest client is pretty good, and there is nothing wrong with it. But we have not been able to deliver what they desire. We need to figure out how to crack that code. We have tried a couple of options but have not succeeded yet.
You have been trying to crack the code with HP for the past two and a half years. How long are you willing to try?
We would consider our efforts a success when revenue (from HP) starts stabilising and growing. Just words or powerpoint slides are not enough. The figures don’t show we have succeeded as yet but why should we give up? They are our largest client and, culturally, Mphasis cannot afford to be arrogant to any customer, let alone our largest customer. Customers are not digits for us.
What about the direct channel (non-HP) business?
It is vibrant. We are seeing a lot of traction and deals. There is a good pipeline in our direct channel and we are optimistic about it.
How is the demand environment?
There is absolutely nothing wrong with the market. There are several deals and opportunities, which are different from earlier but there is business to be secured. The market is definitely better than a year before. The business opportunity that can be secured in the next 12 months is better than what it was in the past 12 months.
Mphasis set out on a transformational journey around 18 months earlier. Has that strategy started paying?
I stand by my statement that we would grow 1.5 times of the market growth. My confidence is because our intensity around the customer and understanding of customers’ business priorities have gone up significantly. Our investment in sales, solutioning and marketing is enabling us to catch the demand upstream rather than downstream. So, with all this, I am happy with where we are.