Mphasis looks to sustain margins as it continues to invest in sales & new capabilities

Blackstone-backed mid-size IT services firm Mphasis is confident of sustaining its margins of 15-17% even as it continues to invest in new capabilities and sales.

The company’s chief executive Nitin Rakesh said that the Indian IT industry is faced with the innovator’s dilemma and had to make tough choices.

“We have been making investments... We grew double digits and increased our margins. Now we are going to take some of those increased margins and put it back,” Rakesh said told ET.

Mphasis reported a 29.6% growth in net profit to ₹250.8 crore for the January-March quarter. The Blackstone-backed firm posted revenues of $1.15 billion for fiscal 2018.

“We took a big bet on a few areas this time last year, where we had to actually go below our guided bandwidth of 14-16%,” he said. “I was very confident that I will actually be able to bring that (margins) back because we invested in large deals, transition capabilities, hired people and invested in sales and marketing.”

The share of revenue in Direct Core, the part of Mphasis business that is comparable to traditional IT stood at 43% for the quarter ended March 31. Of this, 83% of deals for Direct Core came in digital and NextGen services.

“It’s not an easy balance. There is definitely what we call the innovator’s dilemma in play,” Rakesh said. “If you stay to the core-traditional IT services, which by the way is high margin, high free cash, then you are obviously starting to face headwinds with pressure on pricing and growth. That starts to kind of have its own knock-on effect and creates downstream problems.”

In Q4-FY18, revenue from the DXC/HP business grew 28.1% over the last year, which came on the back of large transformation deals.

The Bengaluru-headquartered company will be focussing on expanding its footprint in Europe in the coming year. Revenue from Europe grew 34% in Q4 over the last year, prompting the company to increase its investment in the region.

Mphasis relaunched its subsidiary Wyde in France in December 2017 that has a footprint in Europe and the US.