'Our margins have been on an upswing'
Smart Investor, Business Standard, March 11, 2002.

Unlike other IT companies, the annuity-based revenues from IT-enabled services provides considerable amount of visibility to our revenues and earnings

After undergoing merger pangs in the last fiscal, MphasiS BFL Ltd is back on the growth trajectory. For the nine months ended December 2001, the groupís consolidated revenues vaulted 21.5 per cent to Rs 229.36 crore, while the bottomline bloated 345 per cent to Rs 27.72 crore.

The company also has the distinction of being one of the first domestic IT companies to provide growth guidance (future projections) for the next fiscal. It projects topline and bottomline to grow by about 25-30 per cent and 60-70 per cent respectively for FY03.

Gaurav Dua spoke to Ravi Ramu, chief financial officer, MphasiS BFL Ltd about the recently announced growth projections for FY03 and the developments in the IT-enabled services (ITES) business, which is touted to grow exponentially in the future.

What inspired the company to provide projections for the next fiscal, especially when others have avoided to do so?

Unlike other IT companies, the annuity-based revenues from IT-enabled services (ITES) provides us with considerable amount of visibility about our revenues and earnings in the next fiscal.

We are estimating a 200 per cent growth in revenues from ITES business in FY03, which is one of the primary factors in our projections.

A 200 per cent growth in ITES business means that you are expecting a modest revenue growth of about 11-12 per cent in the software services business. Are you bearish about the growth potential of software services?

No, it isnít that we are not optimistic about software services. But in the prevailing scenario, it is difficult to predict the growth in software services business. Though the worst seems to be behind us, the uncertainty still exists.

On the other hand, the long-term contracts in ITES give us a fair idea about future cash flows. Thus, we have given a specific guidance of 200 per cent in case of MphasiS BPO, the fully owned US-based subsidiary for ITES business.

The software services business is also doing well. In fact, volumes grew sequentially by 12 per cent in the quarter ended December 2001.

However, the pressure on the billing rates resulted in a much lower revenue growth of about five per cent from the software services business. Thus, the volume growth, to an extent, was offset by the reduction in billing rates.

The projections also indicate that the company expects the net profit margins (NPM) to improve from the current level of 12 per cent to around 17 per cent in FY03. How do you propose to do this?

The margins have been on an upswing since the beginning of this fiscal.

Though the NPM was at 12.1 per cent for the nine months ended December 2001, it was actually much higher at 16.1 per cent in the last quarter.

We expect this trend to continue and achieve net margins of around 17 per cent during the next fiscal. Thatís because the ramping up of operations at MphasiS BPO will improve the consolidated margins, as the incremental cost is very low. We are recruiting about 80 to 100 professionals in MphasiS BPO every month.

The expenses related to the facility cost and leased lines will remain more or less the same even with further increase in manpower. We have already expanded the total call centre capacity to 600 seats, with an option to expand to about 1,000 seats.

The significant improvement in the onsite to offshore business mix will also have a positive impact on the margins. For the quarter ended December 2001, the share of offshore revenues has increased to 46 per cent, up from 37 per cent in the corresponding period last year.

The margins in the offshore business are normally higher than those in the onsite business.

Moreover, the initiatives to streamline operations after the merger in 2000, have helped us control the sales, general & administrative (SG&A) expenses. The tight control on SG&A expenses will enable us improve margins in future also.

In the software services business, contribution of revenues from fixed priced projects (FPP) have declined considerably to 28 per cent from around 39 per cent in the last fiscal. Is the company consciously shifting away from time & material (T&M) based projects?

No, thatís not the case. There is no conscious effort to shift to FPPs from T&M projects. It actually depends on customersí needs and nature of the project. Normally, the higher-end and large projects are negotiated on a fixed-price basis.

What are the average billing rates for the ITES business? Donít you think the increasing competition could hamper growth in future?

We have an average billing rate of around $11 per hour in the ITES business. There is no denying that competition will further intensify in future. But, we are confident of growing the business at a steady rate.

With a focus on delivering high quality services, we have been successful with all the pilot projects. Thus, most of the clients are looking at increasing the flow of business with us.

On the other hand, there are companies that are not focused on quality or donít have the required critical size. These companies are facing problems in generating enough business. Moreover, we have been quite conscious about building capacities in proportion to the growth in business.

What is the free cash position of the company? What is the planned utilisation of these funds?

As of end December 2001, the balance of cash and cash equivalents in the group was Rs 79.7 crore as compared to Rs 24.7 crore on December 31, 2000. We generated free cash of about Rs 15 crore in the last quarter alone.

The utilisation of funds include investments in MphasiS BPO. We had earmarked an investment of $5 mn to $6 mn in MphasiS BPO in July 2001, out of which about $4 mln has already been spent on building the facilities in Pune and Bangalore.

The rest will be invested in highly-rated instruments by banks, financial institutions and companies for short to medium term duration.

What is your reaction to the budget announced recently?

Overall, the budget has left the entire IT industry disappointed and confused. Disappointed, because the finance minister has backtracked on his earlier commitment by introducing a corporate tax of 10 per cent on all export earnings. It is confusing because this has resulted in a new regime of uncertainty.

The fast-growing ITES sector hasnít even been mentioned in the budget. We were expecting some sops from the finance minister for the ITES industry, as it has a vast potential for providing employment to the countryís huge majority of English-speaking unemployed graduates.