The Mastek group is trying to revamp its operations and expects the US to drive revenue growth and Europe to remain stable. The company embarked on business process outsourcing operations last year and is looking at alliances and joint ventures with BPO companies.

Its sales grew 1.3 per cent to Rs 88.53 crore (Rs 885.3 million) while net profit rose 10.18 per cent to Rs 3.03 crore (Rs 30.3 million) sequentially in the quarter ended September 30, 2003.

The stock trades at Rs 218 on the BSE at a P/E of around 11x. Ashank Desai, chairman and managing director, talks to Arun Rajendran about the status of his company's contracts across geographies and the strategies for growing them.

Mastek's employee strength grew 57 per cent on an year-on-year basis in June 2003. However, revenues have not grown in tandem. Are you planning to add more employees? How do you plan to improve operating margins?

We plan to add about 1,000-1,200 people in the current fiscal. The number of employees in our offshore business has gone up from 645 to 1,321 in the last fiscal -- an increase of around 700 people. Offshore revenue per person is lower.

Therefore, a 50 per cent addition in people wouldn't translate into a 50 per cent increase in revenue. It would be about half of that. The percentage addition of staff to offshore operations is more as our business is turning into an offshore one.

As far as our operating margins are concerned, we have two basic long-term strategies. The first is to improve sales as a percentage of marketing costs.

We will continue to invest in marketing and sales in order to maintain revenue buoyancy. We will look to get more revenue per person which would translate into higher sales.

The second is to take cost-control measures by looking at our overheads as direct costs. The effects of these measures wouldn't be visible immediately as our strategy is a long-term one.

Your revenues from Europe and the Asia Pacific are on the decline when most IT companies are making inroads in these regions to cut down their US exposure. How do you explain this?

Our Europe exposure is very high compared to other IT firms. In fact, above 60 per cent of our revenues come from Europe while last year 30-35 per cent came from the US.

That happened because of the strategy that we are following in strengthening our customer base in the US. We want to increase our US revenues.

Ideally, we would like revenues from the US to contribute around 50 per cent of our total sales as the US is the largest market in the world. We can't afford to have lower revenues from the region.

What is the status of the London road congestion charging project?

The LCC project eliminates tollbooths by maintaining records of payments made by motorists who drive through the charging zone. It was a large project that we undertook for Capita of the UK.

It went live on February 17, 2003. We have delivered the project technically. However, our team is still there, carrying out maintenance work.

Revenues from the government domain have declined by 24.2 per cent sequentially in the September quarter. How is the company looking to offset the loss of revenue from this segment?

A major reason for the decrease of revenues from the government is the completion of the LCC project. However, the banking, financial services and insurance segment has grown.

In future, we would be looking to increase revenues from both BFSI and the government.

What is your view on the decline in the order-book position in the September quarter? After the completion of LCC, what is the company banking on to drive revenues?

Yes, our order-book position has gone down. We continue to bid for projects as they are our strength. We need to improve our success ratio while bidding for projects. Our focus is on getting more business offshore.

We are continuing to offset the loss of these projects with multi-layered projects which have a continuity element to it. We are bagging a fair amount of new projects and focusing on the outsourcing agreements that we have with some of our customers.

We are also focusing on the annuity maintenance kind of long-term outsourcing orders and hope to keep the momentum going.

Has the revenue flow from the joint venture with Deloitte Consulting been up to expectations?

So far the revenue flow has been up to expectations. In fact, we had a rather productive year with the profit after tax of the venture growing 232 per cent over the previous year.

We have about 400 people working for the JV and we are poised to meet our targets. We have a pretty good synergy going on between us. We worked pretty closely in the last few years. We have also mutually gained from our respective company cultures.

The company has witnessed consistent sequential decline in utilisation levels. What is your view on them?

It is a part of the growth story. In 2001 and 2002, employee growth was relatively lower. When growth is lower, you tend to utilise your people in a better way.

However, the scenario changed last year. The growth in revenues last year was accompanied by an increase in employee numbers, which affected utilisation rates.

What are your views on margins and billing rates going forward?

Margins are under pressure due to the pressure on billing rates and sales and marketing spends. We are not happy about that. Especially when we are talking about lower profit than last year as per our lower-end guidance.

Though the situation is expected to improve going forward, we intend to stay conservative. We are expecting a drop in gross margins from 45 per cent to 39 per cent.

What is the situation on the BPO front?

Last year, we launched our BPO operations through a wholly-owned subsidiary, Mastek BPO. The company's focus is presently on the transaction-processing business in the BFSI (banking, financial services and insurance) segment. We have a scaleable pilot facility at Thane, measuring approximately 8,000 square feet on lease.

Mastek BPO would be targeting new business in the banking domain through its alliance partner Carreker Corp.

The company has a free cash flow of Rs 6 crore. What are you planning to do with it?

We don't have any immediate plans, but going forward, we are planning to invest in expanding infrastructure and taking care of the working capital needs

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