Tech Mahindra CFO Milind Kulkarni (PHOTO: DANESH JASSAWALA/www.indiatodayimages.com)
Milind Kulkarni, CFO of Tech Mahindra, speaks to Business Today about the integration of Tech Mahindra and Mahindra Satyam as well as the road ahead. He says the company is aiming to double revenues in three years though organic and inorganic growth.
Q. What are the financials like for Tech Mahindra?
A. In terms of numbers, the first quarter closed with $724 million in revenues and EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) of 21 per cent. That was quarter-on-quarter (QoQ) sequential growth of about 3.7 percent. Our margins have improved QoQ by 50 bps. The current run rate is about $2.9 billion.
Q. The company has a target of doubling revenues to $5 billion over the coming three years. How do you intend to achieve that?
A. The $5-billion target is a kind of aspirational target. The assumption behind that figure is: current annual revenues are about $3 billion. We should grow higher than the industry growth. So, maybe you assume at 15 to 17 percent for two-and-a-half years. And then having done four acquisitions, we are looking at some more if there are any good fits. So, maybe $500 million coming from an acquisition, and $4.5 billion coming from organic growth in terms of outpacing the industry, that was the idea. It is a challenge to the entire management team.
Q. Could you elaborate on your strategy to achieve this target?
A. We are looking at an aspirational target, so there is a four-pronged strategy. One is business as usual. We want to do more by cross-selling. We would want to sell enterprise solutions to telecom, Tech Mahindra customers as well as selling telecom products to the enterprise customer. We formed a deal team for both the companies because the size of deals in the erstwhile Mahindra Satyam or enterprise division is less compared to the telecom team or their peers. We are developing new capabilities, new geographies and new customer access.
Then we are looking at innovations, which could come internally: we have formed an innovation council, with the aim of facilitating innovation by providing the necessary infrastructure. We are also associating with some of the customers for certain things that are innovative. We have also started a $50-million fund with SBI Holdings Japan, which is to invest in new IT services, IT products or IT consulting businesses. We are supporting new setups that may have some new ideas. That is not just investment; we will provide support by marketing their products or using their services. This is done because in large companies, new ideas might not be very easy to identify, bring out, or promote. We don't want to really compete on numbers.
Q. How many companies have you acquired over the last few years?
A. We have made five acquisitions in the last 18 months. Hutchison Global Services, which was only servicing Hutch in Australia, UK and Ireland. We have Comviva and ComplexIt. Satyam acquired vCustomer in April 2013.
Q. How do you compare with your peers? Could you elaborate on your employee costs and other parameters?
A. Employee costs have been under control. We have been able to absorb employee cost increases through either productivity improvement, or by improving our business mix. Employee attrition's been reasonably low as well. The general environment is one factor. But all IT companies today are focusing more on productivity improvement. One strategy of ours is for example: product and platform. We are now thinking of providing platforms for services so that the efforts come down. Each of our peers is also doing that. One point to keep in mind is that manpower growth today is not proportional to revenue growth. Revenue growth is higher. That is also easing some demand pressures in the IT industry.
Q. What is the nature of the companies you have acquired, and how are they changing?
A. We acquired Comviva because it is in the value-added space. We have also been there from Tech Mahindra through our subsidiary CanvasM. But Comviva's far more entrenched in that market, and it has a major income coming from Africa, which is one of the focus areas. As far as adding new companies is concerned, we will not add just to balloon our revenues.
In terms of what we are going to acquire, well after the merger of Mahindra Satyam, we are now present in almost every vertical. The sweet spot could be telecom, BFSI and maybe healthcare. We will do an acquisition only if it gives us some capabilities, or gives us some customer acquisition, or if it is a new geography.
Q. How is the M&A market today for IT companies?
A. Generally, sellers have become more reasonable. It might just be different going forward, because some of these companies are based out of India. There could be some transitory benefit of currency depreciation. We are looking at PE multiples or EBITDA multiples that are low, (that is) where we can add value. Otherwise, it is like buying an annuity. In the ones we have acquired, we have added either capabilities in terms of marketing bandwidth or management bandwidth. After Satyam, we didn't do anything for three years. Because we wanted to integrate it completely.
Q. You seem to have sorted out the litigation issues in the integration of Tech Mahindra and Mahindra Satyam. What is the way forward in integrating the two companies?
A. Both companies are working now for about four years. So sales and some of the other functions have been integrated over a period. But then there are limitations to the integration as long as it is two companies with minority cross-holdings between the two companies. You also have to be careful about corporate governance issues. So finance, legal, secretarial were completely handled differently. There was no integration there. Delivery and sales, there were dealings at arm's length. Finance was kept separate to the extent that when Mahindra Satyam had surplus cash, Tech Mahindra didn't use it. Tech Mahindra had made borrowings for the Satyam acquisition, these were not integrated. That now has started happening for the last three months - finance, legal, secretarial, in India as well as abroad.
Both the companies had operations in some 30 countries, in common. We have now moved to one common platform in terms of the (operational) IT backend. So that the merger is complete also in the virtual world. In fact, on June 30, what we did was there were two separate trial-balances, which were merged. Now we are on one platform. Even employees' access has now been integrated. Systems, as well as processes, are now being integrated, but it will be a couple of quarters before everything is together.
Q. Goals and the key challenges you see ahead in the short to medium term?
A. Technology enablement is being rolled out for employees who are inclined to innovation. It is a cost, I agree, but it also derives long-term benefits. (We are also) investing into products. For example, Comviva has some license revenue. They have some license for a technology of transfer of money through mobile devices. It is a small proportion of business today, but we are actively investing, so that it is not always people-based growth.
Q. What are the challenges before the finance team today?
A. Volatility in the currency is something that the entire finance division has had to get in its strides. The other challenge is that over the years, the companies have been getting into newer and newer countries. So we have had to improve our governance so as to take care of the legal and other requirements of those countries. And to ensure that international taxation and compliance is something we are abreast of.