The nature of deals in India’s information technology sector is undergoing a change as clients shun “big bang approach” in favour of investing in a “series of technological developments”, according to CP Gurnani.
Most of the larger technology companies have already taken this into account, Tech Mahindra Ltd.’s chief executive officer and managing director told BloombergQuint in an interview on the sidelines of the World Economic Forum in Davos.
“Wherever there’s a large deal, yes the revenue realisation may happen in the same year, but the profit realisation happens in the second and third years.” However, he doesn’t expect this shift to have a significant impact on the companies’ operating margin or yields.
Gurnani said the need for modernisation and migration will create new deals for the IT industry’s telecom business. “In telecom, modernisation has to take place,” he said, explaining that clients will need to modernise their networks and software systems. They will also have to migrate to other industries—be it health tech, media or sports—as they turn towards integrated services, he said.
The telecom segment accounted for around 41 percent of Tech Mahindra’s financial year 2018-19 revenue.
Tech Mahindra has taken bets on 5G, Gurnani said, adding there’s a clear indication that the number of trials will increase dramatically through 2020. “Many countries would start seeing the roll-outs but in 2021, 5G will become a fabric on a lot of solutions.”
Business from group company Mahindra & Mahindra Ltd. will drive deals in the telecom segment for Tech Mahindra, Gurnani said.
On the banking and financial services segment, spending by banks will increase going forward as they prepare to cater for more “demanding and choosier” customers, bringing new deals for all technology companies.
Growth Vs Margins
Speaking about the outlook for the industry, Gurnani said that the “go-go days of 20 percent growth may not happen, but 8-10 percent growth is sustainable for most of the large IT companies”.
When asked about his plan to make the company’s margin match up with peers, he said “ there will obviously be an improvement but we aren’t going to be the highest margin because I’m going to balance my growth and operating margin.”
“I am also going to press the pedal harder on growth.”
WATCH | Days of 20% growth are gone for big IT companies, says CP Gurnani.
Here are edited excerpts of the interview:
Let me start by asking you this prognosis of a slightly slower growth this year globally and maybe slower growth during the course of this decade. What does this tell you about the kind of demand that India’s IT companies will face from clients abroad and the kind of growth trajectory that we will see unfolding over the course of the next few years?
I’m a quite upbeat about the Indian IT sector and more importantly, the role that a company like Tech Mahindra would play in the new modern world. I use the word “modern” just to give you an indication that Tech Mahindra has taken bets on 5G, software-defined networks and it’s a clear indication and the response we are getting from the market is that in 5G, number of trials will increase dramatically through 2020. Many countries would start seeing the roll outs but in 2021, 5G will become a fabric on a lot of solutions. I was on one of the panels yesterday, on the future of mobility. In cities like Delhi and Mumbai, eventually I would like to believe that drones as an individual mode of transport is a future for mobility, but you cannot function on a network of drones without a 5G connectivity.
So, telecom is your largest vertical in terms of a contributor to revenue. What kind of upside do you expect technologies like 5G to bring to you through the course of this year and maybe in the next 3-5 years because, this is going to be an extensive roll out for the capex. A telecom company is at least going to take 5-7 years or 3-5 years for 5G, conservatively.
Again, an off-the-cuff remark and we were joking in the senior leadership at Tech Mahindra that our parent company, Mahindra is called M&M and for us, the biggest opportunity in telecom is M&M which means modernisation and migration. So, what you are seeing out here is, in telecom, modernisation has to take place. Modernisation of networks, modernisation of the software systems that back you up, and the migration of telcos to become a more enterprise-oriented business house. So, whether they choose a health-tech or whether they choose media or whether they choose sports. But you would see telcos starting to do a lot more migration into integrated services.
Impact on revenue?
As I said, we’re in a silent period.
But you’re in a silent period for this quarter. Not this year or next three years, right?
Again, we’ve never given any forecast.
But the impact of revenue given that this is a big vertical, given that this transition will take place for telecom communication companies across the world. What kind of upside revenue do you think this will bring you, in percentage terms?
I don’t think we have ever given any kind of a future guidance, whether it is for the industry in terms of real numbers. As I said, I do believe telcos around the world are modernising and we will have a fair play. It’s our biggest sector and also, we’re the largest service provider in this segment.
Banking and financial services. Many of your Indian peers have said that seems a little softer now, but Gartner seems to suggest that BFSI spending in India is going to increase, marginally, but this year. What’s your outlook on what that sector that will bring you?
For us, it’s a significant portion of revenue but not the biggest. What we’re seeing is that, in banking and financial services, the banks are investing in omni-channel customer experiences. The banks are modernising particularly for their migration to cloud, because banks were slow adopters to cloud. For them, data security and whether the cloud is secure or not, it took a much longer period and number three is cyber security and number four is mismanagement. So, I tend to agree with Gartner that the spending in banks will increase and the reasoning is very simple. That is, the customers have become a lot more demanding and choosy and the banks will have to respond with technology.
In both these cases—both in telecom and in BFSI—what kind of deals? Will the deal structure change dramatically? Would 5G mean bigger deals for you, longer gestation periods for you? Would the deal structure and therefore, the revenue realisation change in any fashion?
The generic statement here is that, most of the customers now are not keen on a big bang approach. The digital transformation by itself lends itself to doing agile and accretive development. So, I don’t see too many large deals but at the same time, I think it’s a series of technology spends which will propel the market. Wherever there is a large deal, yes, the revenue realisation may happen in the same year, but the profit realisation comes only in the second and third years.
Both for telecom and BSFI?
Every large deal because it includes transformation piece and it also takes into account a transition piece and we as a service provider, if we are doing that large deal, will have to invest in transition and transformation.
So, the incremental orders that will come from let’s say 5G or from banks transitioning to a more cloud-based platform, those incremental orders will be lodged. Revenue realisation in that year but as you pointed out, the profit will be seen in several years. Now, will you have to invest considerable amounts of money into reskilling your people into these new areas of business or invest in talent differently? Can you give us an idea of what kind of margin impact these kinds of deals will have?
Most of the larger companies have already taken this into account in their portfolio. For example, this is an example of how you manage your yield and I would like to believe that there is no margin impact because all of us at any given point of time is doing an X percentage in large deals. That means, within the flight we have a few transition transformation projects are happening. So, in future, I don’t see the yield management changing or the portfolio mix changing.
Your operating margins are lower than some of your peers. Is there a plan of action in place in how you will be able to boost them and make them more competitive over the course of this year or next year?
I’m sure that each (of our) shareholders wants us to improve. There will obviously be an improvement but we aren’t going to be the highest margin because I am going to balance my growth and operating margin. I am going to press the pedal harder on growth.
One final question. A few years ago, we were very worried whether Indian IT was losing its edge, given the big shift to digital. Now, many companies have been able to get their act together and pitch for large digital deals. Companies like TCS, Infosys and 40 percent of their deal pipeline is now digital. Has Indian IT made that transition in a smooth fashion? Do you believe that, as an industry what the next 10 years will bring us? Or the kind of prominence that we had in the early or first decade of this millennium, that will slowly fade as the nature of the business changes?
To a large extent as we enter this decade, you will notice that the men and boys are getting separated. You will also notice that many companies who like Tech Mahindra, chose to invest. 5G continues to be my investment phase. Similarly, you saw many organisations either investing in platforms or creating digital capability or products. So, the direction each company has now taken, there is nothing which is 100 percent similar. That is the first part, and the second part is, those who haven’t invested have chosen to merge with other companies. So, I do believe that, the go-go days of 20 percent growth may not happen but 8 to 10 percent growth is sustainable for most of the large Indian IT companies.
Climate change is a point of conversation here in Davos and of course, it should be. I am wondering if there are other business opportunities, right? There are several technology companies talking about—from an industry’s point of view. Many are talking about developed technologies and lead industries towards a more carbon-neutral fashion. Is there an opportunity for India’s IT industry in this fashion?
So, let’s go back. It’s not a Y2K. While sitting in Davos, we may say the slogan is ‘sustain or perish’, but…
Carbon neutrality, people are putting it 10-20 years down the line. It’s a slow process.
That’s what I am trying to say that, it is not a Y2K and there is a business opportunity. The first part of this business opportunity is always in energy management and then, as you go forward, everything that you do, whether it is an industry 4.0 or whether you do smart cities or smart grids, there is an opportunity because sustainability becomes a differentiator. It becomes a platform and a measure for improvement. So, it is clearly an opportunity but not as big as Y2K.
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