MindTree is not affected by Ashok Soota’s exit

Too many vertical divisions

The shares of MindTree are being traded at around Rs.355 in the stock markets now. Mr.Krishnakumar Nataraja is the MD and CEO of the company. MindTree has been experiencing turbulent times in the last one year. The slowdown of the economy in USA and European countries has affected MindTree. For example, cloud computing promises a lot, but customers may not be forthcoming with orders if the economic environment is not satisfactory. MindTree has many vertical operations in the fields of retail, telecom applications, energy, utilities, government, manufacturing, travel, transportation, banking, financial services and media services.

Focus on IT Services

Big banks and financial institutions are already being served by big IT companies. For example, Infosys’ Finnacle is very popular among banks. MindTree is concentrating on mid tier financial institutions. Factory output has declined and it has affected the company’s manufacturing division. Earlier, MindTree was deriving over 40% of its revenues from product engineering services. But now it is concentrating on traditional IT services that form about 65% of its revenues. This makes business sense as IT Services recovers faster after a slowdown, whereas product engineering services takes two to three quarters to recover after a slowdown.

Searching for $50 million customer

Over 90% of the company’s revenues come from traditional services such as application development and maintenance, testing and IMS tech support. The company’s plan is to choose fewer customers and build deeper relationships with them. The idea is to have at least one customer giving more than $50 million annually. MindTree is confident of posting around 16% growth this year. MindTree has 88% of its workforce offshore. As the company keeps moving up the value chain, its need to have onshore workforce will increase. Protectionism in USA due to heavy unemployment (14 million Americans are unemployed as of now) will also increase the company’s share of onshore workforce.

High attrition

The company’s attrition rate is high. It has to effect a reasonable wage hike every year to retain talent. The company abandoned its smartphone project after considering it unviable. This is a surprise, as sale of smartphones is increasing worldwide and in India too. Last year the company posted a 21% revenue growth which was higher than many of its peers. The company has been affected by self-created problems like Kyocera ramp down, abandonment of smartphone project and Ashok Soota’s exit. Inspite of this, it is trying to gamely carry on with a mission. Whether it will succeed or not, only time can tell.

Ashok Soota quits

Ashok Soota quitted MindTree in the beginning of 2011 and started Happiest Minds. Happiest Minds announced 11 more co-founders of which five are former senior executives of MindTree. Ashok Soota sold 822676 shares of MindTree amounting to 2.05% of the total shares of the firm and mopped up Rs.36.2 crore at a valuation of Rs.440 per share. He now holds 3.54% of stake in MindTree. Last month Soota sold 5.49% of MindTree for Rs.94.2 crore. Coffee Day Resorts Pvt Ltd and Global Ventures Pvt Ltd have increased their holding in MindTree to 12.34%. At the present price of around Rs.350, one can invest in the company’s shares at declines (preferably at around Rs.300 – Rs.320) for medium term holding as the company has produced a 7% revenue growth in Q1 to Rs.413.10 crore compared to Q4. . But there may be a muted margin growth in Q2.

Good Q1 show

During Q1, IT services produced a double digit growth QoQ and a 41.8% YoY. Product engineering business, which was posting negative growth in the earlier quarters, turned around with a 1.7% growth. US business improved by 0.3% to 60.3%. European business improved by 0.9% to 22.8%. Within two days of announcement of Q1 results, the share price of MindTree increased from Rs.360 to Rs.400. The company added 25 new clients in Q1. The number of clients contributing over $1 million a year business remains at 67. Three fourths of the company’s workforce received salary increase during the quarter. The remaining one fourth received their pay hike in July. The company’s net profit increased to Rs.34.60 crore from Rs.32.20 crore in Q4. It was a 117% increase from the figure of Rs.15.90 crore in the corresponding period of the previous year. Its net profit margin slightly increased from 8.23% in Q4 to 8.38%. The company’s realisations also improved from $26.8/hour to $27.1/hour. The company added 900 fresh graduates during this quarter. During the quarter, MindTree added one client to the $10 million per annum business generation, taking the count to seven. At the end of the quarter, the company had 283 active customers. The company is confident of delivering a higher than industry average growth in 2011-12.

Small is beautiful

Indian IT industry is estimated at $70 - $80 billion. McKinsey and Nasscom have predicted that it will grow to $270 - $280 billion. Compared to this, MindTree, with a business of $90 million per quarter, is still a small company. But it is among the top 12 IT service providers in India. Because it is a small company, it was not rocked severely at the exit of Ashok Soota. On the other hand, Infosys was rocked by the exit of Narayana Murthy and other top executives because it was a big IT company. During a storm, a big tree is uprooted, but small lawn bends and survives. The new management is busy scripting the foundation of MindTree Version II, which it hopes to complete in around one and a half years time.

Traffic software

MindTree has launched its automatic traffic counting and classification (ATCC) system to conduct round-the-clock traffic pattern study for single/intermediate/two-lane roads. It is a video-based solution. It enables classification of vehicles into nine different categories and is tamper-proof. MindTree plans to enter toll-software market. It expects to garner around 20% of share in this segment. Rs.3000 crore toll software market will grow by four times in four years. MindTree’s ATCC system can identify vehicles in dark and at high speeds too. MindTree has formed a new data and analytics solutions practice with the integration of its business intelligence, data warehousing and knowledge services practices. It enables the customers to have a one-stop-shop to capture, analyse, enhance and view their business information in support of their corporate objectives. This is one of world’s largest information management practices.

Lesser verticals will benefit the company

MindTree plans to phase out some areas of operations and keep lesser verticals to focus on quality more. In future, MindTree will focus on five major verticals namely infrastructure, telecom, enterprise, portal and business applications. The former Bosch India Chief Albert Hieronimus had been appointed as MindTree’s Chairman after the exit of Ashok Soota. Albert Hieronimus announced after taking charge that the company will be focusing on five major verticals namely banking and financial services, manufacturing, media, retail and travel. What is the reason for this difference of opinion among the company executives? Are they not united in steering the company’s growth? Thinking may be different among individuals in an organisation, but after sorting out their difference, everybody should voice a single view.