For next few years, our bottom line will grow faster than top line: Rostow Ravanan, Mindtree
- Beyond digital, we are thinking how to help customers re-imagine their enterprises using technology.
- Clients are starting to look at the front-end to back-end transformation.
- We are looking at partnerships with Microsoft, start-ups and Universities.
You recently laid out your 3.X transformation strategy. Share with us the key pillars and actions that you plan to execute.
The 3.X was a symbolisation of the fact that strategy no longer moves in discrete steps but it is a continuous evolution. So many parts of what we outlined two years back as a MindTree 3.0 strategy which revolves around focussing on a few package solutions in the digital space like automation and consulting. Some of those themes continue here as well. But it also represents an evolution where we are thinking what is beyond digital. We showcased some of those elements to investors and analysts last week when we held our annual investor conference. Going beyond digital, we are thinking how to help our customers completely re-imagine their enterprises using technology. Some parts of our strategy continues, some are evolving, but that is the nature of our business and the dynamic industry as well as the nature of the clients that we serve and the changing expectations they have.
You derive close to 47% of your revenues from digital as you have been way ahead of your peers in terms of recognising trends and capitalising on them. Going forward, what is the road map for maintaining that digital edge or that momentum as the key growth engine?
Digital is an absolute sweet spot for us. We were amongst the earliest to call the trend. KK then CEO called that trend in 2011-2012 saying that technology will move from being a back office function to a front office function, helping clients grow their revenues using technology. We made a lot of investments, whether in terms of hiring domain experts, technology experts, partnerships with leading technology companies and start-ups. All of that has stood us in good stead till now, Almost half our revenues are growing 2x of MindTree’s revenues.
Our traditional business is also doing quite well. We will continue to make investments, continue to push the boundaries on this. On the digital front, we are beginning to see that customers are somewhere in the middle to the end of their journey where they have completed transforming their front end, what I call the left to right transformation of the front-end that includes things like e-commerce, web, mobile, analytics and cloud.
All these spheres drove the transformation at the front end and are now leading clients to start looking at the front to back transformation which is digitally the inventing the core of the enterprise itself. They have now realised that if they move their traditional applications from mainframe to new technology or older versions of ERPs to newer versions of ERP, the core is getting transformed. We are supporting our clients on that.
As a result, all these macro trends, that have led people like us to get larger, more complex digital opportunities compared to the initial way which was like a few hundred thousand dollars of mobile enabling channel or creating an e-commerce platform with a few hundred thousand dollars to a million dollar ticket sizes. Today when you start doing the larger transformations, it probably becomes 5x or 10x the size in terms of larger deals and we are beginning to see customers paying attention to the fact that these deals require specialisation more than scale. The customer needs five people. If I have a 100 people and my competitor has 10,000 that does not matter to them. Can I put the best five experts of that particular technology in front of the customer for that project is what is more relevant for the customer. The second strategy validation we are seeing in the market today is that our push towards specialisation is paying off as well.
Just to put into numbers, how much revenue comes from consulting in IP led solutions and what kind of growth do you hope to achieve in the next two to three years?
Individually, the consulting and IP revenue is fairly small. It is less than 5% of our revenues but we disclose it in the form because we want to be consistent with the disclosure of the rest of the industry, but we are not offering consulting as a standalone service per se. Therefore to us. It is not the most meaningful metric to track. All the work that we have done in many cases -- whether it is CPG or travel -- some of the work that we are doing is first in class for that entire industry. Things that we are doing nobody in that industry has ever done before in terms of co-creating some new ideas with our customers and creating hundreds of millions of dollars of revenue upside for our customers.
So, there is a very big consulting element built into both the sales, presales and the delivery aspects of what we are doing. The standalone consulting and IP revenue is probably not the most important metric for us right now. However, the solution based sales will make a big difference in the future. It is less than 5% of our revenues right now. If everything goes well as have planned in a few years from now, that should become 10% or more of our revenue.
What kind of investment are you making in areas beyond digital?
We are continuing to look at those and like I explained before, there are broadly three types; one, we are investing and building the capability internally. We are hiring people, training people etc internally and to that extent, it is business as usual, an ongoing kind of investment.
Occasionally, we are looking at partnerships whether it is very large technology companies like a Microsoft or very young start-up companies as well. There is no financial investment in that area because obviously it is a partnership to either get into the product roadmap, learn their technology and then implement it for a customer there. The third is something we are very excited about. It is an ongoing relationship with several leading academic institutes specifically in the field of AI.
We have already committed $2 million to endow a chair at Stanford University, and are exploring similar partnerships with two universities in India as well on AI in specific sub segment specific verticals.
That kind of partnerships probably will cost between $3-4 million this year and from year to year, we will look at the ideas that come to us and the opportunities that are in front of us and calibrate investments accordingly.
You aim to deliver industry leading growth with improved margins that are going to lead to faster bottom line growth. In a base case outlook, would high teen dollar revenue growth with a 350-400 bps margin expansion over the next couple of years be comfortably achievable or am I stretching the target too much?
I will duck that question mainly because we do not give guidance. I do not want to specify either an exact growth percentage or a margin percentage but qualitatively we shared that in the beginning of the year. At the beginning of the current quarter, we are poised to continue the trajectory over the last few years where we lead the industry growth rates and over time bring the margins back to the historical figure of 17-18%. For the next few years, our bottom line growth will be faster than top line growth and top line growth will be faster than the industry.
What is the cash in books and what is the plan on the period structured buybacks if you are looking at doing that to enhance shareholder returns?
As we told our investors last week when we had our annual meet that the plan is to continuously increase dividends because we believe our business does not require that much cash, the business throws up a fair amount of free cash flow every year and the general principle is that we will return surplus cash back to investors. So the normal year-to-year routine will be to continuously increase dividend payout ratios. At periodic intervals, when markets give you the opportunity, with regulatory requirements keeping some of those factors in mind, we will also evaluate buybacks.