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See EBIDTA margins reaching 18-19% in few quarters: Mindtree

Q: Is there a general improvement in the mood of your clients, are they willing to give you an idea of 2011 budgets at all?

A: Clearly, the conversations, which we are having with our clients, are far more positive than what it was in the last twelve months. Today, we see clients being lot more optimistic of their future, clearly they are looking at initiating strategic projects, which will impact the way in which they compete in the market. So, overall, we see a far more positive demand environment with the client. I think it will be another four-six weeks before we can get a real handle in terms of how that is going to translate into FY11 growth numbers. But clearly I see a lot more positive conversation with our customers.

Q: There is this feeling in the market that SPE or atleast R&D is not catching up as much as the other businesses would and you have a substantial about more than 40% exposure to that business. Do you think that could be a bit of a drag for Mindtree going forward?

A: Typically, the product engineering services business tends to lag behind the demand curve on the IT services business. Since we have about 60% of our revenues coming in from IT services, the first two quarters of this year we had good growth in IT services. Infact in Q2 we had a record growth in IT services of 12% QoQ whereas the product engineering services was lower at about 4%. But we do see that market also starting to look far more positive. Infact we are starting to see the growth momentum pick up both on our R&D services as well as the software product engineering services because that market tends to lag behind a little bit of the enterprise market. Looking ahead for FY11, I do believe that the product engineering services also will get into a growth momentum next year.

Q: Can you take us through that business that you have closed and you are over and done with, initially the handset business was expected to engender a write off of about what USD 12-14 million. I understand now that the cost has been scaled down considerably or the expected write off has been scaled down considerably, you would have a final figure now?

A: You are right. I think when we announced our Q2 results, we did estimate that the closure cost of part of our smart phone business would be in the region of USD 12-14 million. We are still working through the details, but clearly the indications are it will be significantly lower than what had estimated. I think in the next two-three weeks we would have an accurate number which we will certainly share with the market. But clearly we have done a good job in terms of ensuring that the losses due to that are minimised.

Q: Some people in the market are working with almost half that figure, is that optimism justified?

A: I would think certainly, it would be in that range. But again at this point, I cannot share exact numbers. We are in the final stages of trying to close that, maybe in the next two-three weeks we will have absolutely an accurate number which we will share with the market.

Q: What about the margins? We have been seeing about 14-15% margins reported by MindTree off late, do you think we can scale up to that 18-20% band in the next few quarters?

A: What we have shared with the market is that we do believe an earnings before interest, taxes, depreciation and amortization (EBITDA) margin levels of 18-19% is what we would be at a steady state reaching and certainly in the next few quarters, we will reach those numbers.

Obviously, today we are certainly in an investment mode, if you have seen the last year to a year and a half even during times of recession, we have added client facing, account managers, we have added front end sales force which means our SG&A had gone up too close to about 23%. A lot of that will start yielding in terms of scales. So, we do expect in the next few quarters, we will reach 18-19% EBITDA margin level.

Q: Should I assume therefore that attrition pressures are tapering off atleast?

A: Attrition pressures are certainly tapering off, infact last quarter we had LTM of 21.6% attrition. Clearly, this quarter based on indications, we do expect that atleast a few percentage points it will be lower.

Q: Can you give us a slightly better idea of the optimism you are seeing about your clients? For some time one of the complaints of your investors used to be that your top five clients’ contribution is remaining static, you must be very familiar with those clients, are you getting an impression that you are going to get more orders from them or better billing rates?

A: On the pricing front, we do see lot more optimism. In the last two years, we have had a negative pricing environment when the recession started after which pricing pressures sort of stabilised and clearly now we see the opportunity to get some improvement in the pricing level.

As far as our top five or ten clients are concerned, we certainly see that the conversations with them are far more optimistic, some of them who had put hold on strategic projects are starting to reinitiate that so we do anticipate that they would start growing. There could be some sectoral variations where there could be lower than what you could call the industry growth. But overall we see a positive conversation with our top ten customers.