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MindTree Ltd
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Ladies and gentlemen, good day, and welcome to the Mindtree Limited Q3 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Sushanth Pai. Thank you, and over to you, sir.
Thanks. [indiscernible]. Welcome to this conference call to discuss the financial results for Mindtree for the third quarter ended December 31, 2017. I'm Sushanth, Head of Investor Relations. Before we start the proceedings, I would like to wish you all a very happy and prosperous 2018. On this call, we have with us senior management team, Krishnakumar Natarajan, Executive Chairman; Rostow Ravanan, Senior Managing Director; Parthasarathy N.S., Executive Vice Chairman and COO; and Jagannathan Chakravarthi, CFO. Our agenda for this session is as follows: Rostow and Jagan will begin with a brief overview of the company's performance, after which, we will open the floor for the Q&A session. Since we have introduced an audio webcast, some of you may have joined the webcast, the webcast is in listen-only mode, but you can post questions. We will take the webcast questions once we complete the questions through the conference call mode. Please note that this call is meant only for the analysts and investors. In case there's anyone from the media, we request you to please disconnect as we just concluded the media briefing before this call. Before I hand over, let me begin with the safe harbor statement. During the course of the call, we could make forward-looking statements. These statements are considering the environment we see as of today, and obviously carry a risk in terms of uncertainty, because of which the actual results could be different. We do not undertake to update those statements periodically. I now pass it on to Rostow.
Thank you, Sushanth. Good evening to all our friends from the investment community on this call. Let me also start by wishing all our friends and neighbors and community a very happy and prosperous 2018. Coming to our results for the quarter. Very happy to share that our Q3 revenues came in at $214.3 million, which represents a Q-o-Q growth of 3.9% and 11.5% growth on a Y-o-Y basis. On a constant currency basis, our Q-o-Q growth was marginally higher at 4%. This has been our best Q3 performance since 2011 in spite of the seasonalities associated for this period. Our Executive Smart approach to delivering continues to bear fruit and contributed to a robust quarter on all fronts. Breaking up our financial performance by vertical, both verticals showed good momentum and growth in this quarter. The travel industry led the growth with 9.3% compared to the previous quarter. Retail, CPG and Manufacturing grew by 5.8%, and BFSI grew by 3.7%. Looking at our results on a geography perspective. The U.S. business showed a very good growth of 7.3% at this quarter. Digital grew 7.1% in this quarter and 24.2% Y-o-Y, which indicates our strong market positioning on Digital. Amongst the other service lines, independent testing led the growth in this quarter with 8.4% on a Q-o-Q basis and 11.7% on a Y-o-Y basis. At the end of the quarter, we have 344 active customers. We added 28 new clients in quarter 3. Our top 10 clients have shown a good growth of 8.3% Q-o-Q and 15% Y-o-Y. Trailing 12-month attrition has fallen to 12.6% compared to 14% last quarter. Quarterly annualized attrition is slightly higher at 13.2%, compared to 12% in the previous quarter. At the end of the quarter, we had 17,200 people. During this quarter, we had a gross addition of 857 people at a lateral level and 473 campus graduates joined us in this quarter. This quarter also saw some very strong multi-year, multimillion dollar wins in our sweet spots. And also, wins include: providing digital transformation, quality assurance and technology operations service for a leading industry association in the education sector in the U.S., providing managed services for a leading technology company. We're also proud to be chosen as the anchor digital partner for an enterprise-wide transformation initiative for a large beauty care company. We won an order to implement ShotClasses, Mindtree's employee and micro -- employee training and micro learning platform for a leading consumer goods company. We are also engaged to migrate SAP ERP and BI solutions to SAP HANA for a large commercial vehicle retailer in the U.S. Coming to the outlook, we signed contracts worth $244 million in Q3, of which renewals were $187 million and new contracts were $57 million. Contracts to be executed within 1 year was $206 million, and greater than 1 year was $38 million. Digital contracts during this quarter was $132 million. We continue to see strong contract closure and pipeline growth. For Q4, revenue growth is likely to be in the similar range of what we saw in Q2 and Q3 of this year. Therefore, we continue to be on track for high single-digit growth for FY '18 on a Mindtree consolidated basis. With that, I'm handing over to my colleague, Jagan, to share a few other financial highlights.
Thank you, Rostow. Good evening to all. Wish you all a very happy and prosperous new year 2018. In Q3, our fee revenue grew by 3.8%. Volume dropped by 1.9% and pricing realization increased by 5.7%. Volume dropped mainly because of [indiscernible]. Without this impact, volume would have grown by 0.6%. Price realization increase is mainly due to additional revenue generated at some projects moving from transition to steady state. Overall pricing is stable. We have significant improvements on our EBITDA margin. On a consolidated basis, EBITDA margins are at 5.1% as compared to 11.6% in Q2...
15.1%.
Sorry, 15.1% as compared to 11.6% in Q2. The headwinds in this quarter were as follows: 50 basis point impact on a [ round of salary increments; ] currency impacts of 20 basis points, this was offset by tailwinds at total; operational improvement of 180 basis points, mainly due to some of our projects moving to steady state from transition phase; absence of onetime people restructuring costs of 90 basis points; increase in leverage of 130 bps; and absence of buyback cost of 30 basis points. Quarter-on-quarter, we have a ForEx loss of $1.3 million compared to ForEx gain of $1.9 million in the previous quarter. PAT for the quarter has improved to 10.3 percentage, a Q-on-Q improvement of 13.8% and 44.1% Y-o-Y. EPS was at INR 8.61, with a quarter-on-quarter growth of 15.6% and 40.4% year-on-year. Our cash conversion have been strong, and EBITDA to operating cash flow conversion are 83.3% and EBITDA to free cash flow at 72.1%. [ Later on, ] capital employed was stable at 24.4 percentage. The Board of Directors at its meeting held on January 17, 2018 has recommended an interim dividend of 20%, with INR 2 per equity share. Some points on margin outlook for Q4: we will have 385 campus minds joining us, we will continue our focus on operational efficiency, and we expect quarter 4 margin to be stable. With this, I conclude the update.
And for that, we can now take questions.
[Operator Instructions] We take the first question from the line of Mukul Garg from Haitong Securities.
Rostow, my first question -- or probably this is more relevant for Jagan, was on the realization. You mentioned that there was a movement of projects from early to steady state, but can you give us a sense of exactly how -- what is the size of the project and how much was the impact? Because the realization change in reported numbers is quite significant. So if you can throw some more color on this.
Yes, the projects are sizable projects, but I do not have the number exactly on how much of the realization was due to this revenue momentum -- moving from transition to the steady state, Mukul.
Okay. But in general, because if you look at the on-site pricing and offshore, both were up about 5% on average from last quarter. So are we expecting some reversion back to previous realized rate per hour? Or is this something which should remain stable going forward?
No. The rates are in a stable and [indiscernible] percent. This quarter, one, this transition was there on the revenue side. As for the number of working days, they are lower compared to Q2. So all this has played a part on price realization improving by 5.8%. You will not have similar amount of improvement next quarter, but it is in a stable situation actually.
Understood. And if I may ask one more question. The second was on the top 2 to 5 clients. You've seen a very healthy growth this quarter. And I think this is the strongest numbers in 1Q '17 in revenue. So should we assume that all these troubles, which were there with your clients outside the -- in the top 5, outside the top client are over now, and, going forward, these clients will resume a healthy growth?
This is Rostow. Yes, broadly, that is our expectation that the challenges we faced with some of our large clients, where we saw revenue decreased, I think are behind us and we have sort of turned around the corner now and expect to maintain similar sort of growth rates like what we saw in Q2 and Q3 going forward. And the clients that are now continuing as our top 10 customers now have a lot of potential for us to mine and grow.
We take the next question from the line of Madhu Babu from Prabhudas Lilladher.
So considering the strong exit rate, so next year, can we look at the 13% to 15% kind of dollar revenue growth for the company because the worst is behind?
Difficult to make any comment on it, to be honest. One, is because we don't give guidance, and therefore we don't want to comment on a specific number or a range. But even otherwise, I think it's too early. We're just waiting for feedback from customers on next year's budget. Our own plans for next year is not yet [ programmed ], et cetera. So difficult to comment on growth rate for next year at this stage.
Okay. So but, sir, implied guidance for 4Q is around 4% quarter-on-quarter growth, right?
No. We said it's somewhere in the region of Q2 and Q3. So Q2 was 3%, Q3 was 3.9%, so it will be somewhere in that range.
Okay. Okay. And sir, I think, once again, the good momentum in the top accounts. So how is the market share there? And do we have potential for further growth, because on year-over-year basis, almost 30% growth in the top account?
Our largest customer grew significantly even over the last 3 or 4 years. We continue to have great relationships and teamwork delivery. So there is a lot of confidence about future growth potential in that account. However, I don't want to be overly contented only on that. It's a big effort to growing the 2 to 10 customers, and also the 11 to 25 customers.
And sir, just lastly on the digital side, I think some of the larger players have been showing larger deals on the Digital side. So how are the deals that are increasing for us? And just on the margins that -- are we confident that we will be sustaining 15%, 16% from here on?
So on Digital, yes, we are also seeing the same trend. In fact, we probably called the trend ahead of the rest of the industry, where digital projects are becoming larger, digital is becoming close to some of the industrial size kind of thing. So we are seeing larger, longer, multiyear, multimillion dollar kind of programs in digital as a market trend. But what is more heartening and more exciting for us is customers are convinced that Mindtree is a great partner for them for those deals. So I think we have 2 advantages of Mindtree's positioning resonating very well in a turning market. So that's as far as the Digital question goes. As far as margin goes, we are reasonably confident that we'll maintain the kind of revenue sort of margins that we showed in Q3 into Q4 as well.
[Operator Instructions] We take the next question from the line of Sagar Lele from Motilal Oswal Securities.
Rostow, could you probably highlight how the performance in this quarter has been on the acquisitions front, both Bluefin and Magnet 360; if you could just give us numbers in terms of both revenue and profitability? And if any of the overall profitability improvement that you've seen in the quarter has been attributed to things getting better here.
Bluefin was largely flat in this quarter, I think like maybe 300 or 400 [ crore ] decline over the previous quarter. But I would say largely flat over the previous quarter. And I think at the bottom end level, Bluefin made a small loss. So revenue was largely flat and a small loss at an EBITDA level for the Bluefin business. Magnet had a very good growth over the previous quarter, but it is still lower than their fixed cost. So the business made a loss at a Magnet level. However, you have to keep in mind that the sales force [ practice ] -- and both Mindtree and Magnet are legal entities, so some of our sales force revenues are also booked in Mindtree books. So I think it's going to be breakeven or maybe slightly profitable on a [ fractured ] basis for the Magnet business. Though on a reported basis, the Magnet business reported a loss. At this point of time, I think we are confident that the worst is behind us. I'm very positive on the sort of future outlook for both of these businesses. Going forward, both of them will also get fully integrated into Mindtree. The Bluefin business now, both legally and operationally, fully merged into Mindtree. As soon as we receive regulatory approval, the Magnet business will also be fully integrated to Mindtree. So some of these legal entity base reporting distortions should also go away in 1 or 2 quarters.
Sure. Just to follow-up on that. In the last quarter, there was a 2.2% difference between your reported EBITDA and the EBITDA margin, excluding acquisitions. Would that gap have narrowed down now? Or is it still similar?
Yes, it has narrowed down this quarter. It is Jagan here. It has narrowed down.
We'll take the next question from the line of Gaurav Rateria from Morgan Stanley.
Firstly, on the quarter, did the revenue growth surprise positively to you guys? And how much of it was led by very -- better macro? Or how much of it is led by better execution at the Mindtree level?
I don't think the revenue growth was a surprise. I think we are beginning to see a similar trend even at the end of the previous quarter. And even if you remember the comments we made at the end of last quarter as well as all our investor meetings during the course of this quarter, we had indicated a high degree of confidence not just for Q3, but also over the next 2 or 3 quarters for Mindtree. So I don't think the revenue numbers caught us by surprise. I guess, the performance was the result of some extent, obviously, the improvement of market sentiment perspective. But also a combination of the right strategy, investment behind the right strategy, especially on areas like Digital, et cetera. So definitely, some of those deliberate actions on Mindtree side. Including, if you see this quarter, our independent testing business grew by 8% Q-o-Q, which reflects strong deal momentum across both running the business as well as grow the business kind of projects amongst our client base. So it is definitely a combination of both market sentiment plus also our own actions.
Sure. Second question, how should we read the deal wins data? Because if you look at the trailing 12 months deal wins, it has declined by around 7%, 8% on a Y-o-Y basis and -- while revenues are growing. So should deal wins be looked as a leading indicator or not necessarily? What -- how do you suggest one should look at the deal win data?
No. I think that deal win is a metric that we started reporting based on some good practices that the financial community was sharing with us. So it is a reflection on the kind of business we are winning. So to that extent, it will be an indication of growth, especially since you are also breaking up and saying what is renewals and what is new contracts [ together ]. And you are including some of -- based on also the performance, these are not the deliberate actions we are taking. Is also, like I said, in 2011, '12, we were amongst the earliest to call digital as a trend, and we are already starting thinking on what is beyond digital. So we're now thinking of newer offerings that we will take to clients in the newer model, et cetera. Some of those are also comp shift steps that we are taking on our business.
Sure. Rostow, last question from me. What gives the confidence that we have turned the corner on the portfolio entities? So could you share some color on pipeline or any other metric which provides us this confidence?
Yes. So -- because the pipeline is building up for both our sales force and our SAP business, not just in terms of Mindtree performance, but many of them are also becoming larger opportunities. So today, for example, a midsize, like a $5 billion, EUR 5 billion kind of revenue company that is looking for an end-to-end SAP transformation across our 4 verticals, we have been in the -- being considered for like $30 million, $40 million kind of opportunities. We haven't won any as of today, but beginning to see those kind of opportunities, for example, in our pipeline on the SAP business. Similarly, continuing to see larger pipeline, increasing deal sizes, et cetera, even for our sales force business. So all of those are the reasons why we are now confident of the future. Apart from that, whatever steps that we may be taking in terms of integration, people management, systems cutover, et cetera, all of those are also proceeding on plan. So that's another reason we believe some of those issues are behind us and are confident about the future.
Next question is from the line of Rahul Jain from Emkay Global.
Firstly, just a clarification. You said Q4 revenue outlook saw the 3% to 4% range that you highlighted. Is it for volume growth or revenue growth?
Revenue growth.
Okay. And what was the volume growth on like-to-like basis, as you said, the impact was for lower number of working days?
So Q3 volume was a decline of 1.9% compared to Q2.
Yes. But you said this is mostly because of lesser number of working days.
Combination of Mindtree and [ minds ] taking leave, customers imposing furloughs and also lower working days.
Yes. So on a similar number of days basis, what it should have been?
0.6%.
Positive?
0.6% increase in -- the 1.9% decline should have been a 0.6% increase.
Okay. Also, if I see the revenue client buckets, the top 10, top 25 -- not top 10, but $10 million and $25 million, these client buckets are not showing any increase; rather it has come off. And we are seeing a very spectacular growth in the #1 account and possibly #2 also, which is driving the 2% to 5% metrics as well. So is it that the growth that's now coming from fewer clients much more faster versus total portfolio as a whole?
Not necessarily. If you look at our top 10 clients as a whole have grown faster than Mindtree this quarter. So more than one account has grown. And you also have to keep in mind that the constituents of the top 5 or top 10 today are not the same as what we had 1 year ago or 2 years ago. So there's also a shift in the composition of the accounts, so that makes it difficult to compare like-for-like. But the underlying fact is, those accounts which are our top customers right now all have huge growth potential and have shown good growth in this quarter.
Okay. And on the pricing, you said this is because of some project moving from transition to steady state. Is it something related to some seasonality? Because we see a similar pricing jump in last year same quarter. Is it some way to do with that or is it specific for this year?
No. This would have nothing to do with any previous years' performance. It is a reflection of how our business shaped up in this quarter.
So is it like there is some milestone payment that get highlight once it reaches a certain stage?
No. Like we explained in the past and like what is common in our industry, transition phases are [ based ] differently compared to steady-state phases. Because during the transition time, the customer is paying to [ true-in ] that -- on an internal IT demand of vendor. So transition pricing is usually lower than the steady-state pricing. So as the word gets picked up and it moves into steady-state, revenues are higher.
[Operator Instructions] We take the next question from the line of Ankit Pande from Quant Capital.
My question would be on the sustainability of the growth momentum. We've seen some of the headwinds as you've indicated last call. This sort of tied over for a little bit. And you did mention in the middle of the conference call or in the middle of the Q&A session, that you expect Q2, Q3 like 3 to 4 percentage sequential, like, momentum going forward, and that would indicate well above single-digits growth year-over-year basis. So on one hand, I want you to confirm that whether you meant it in that way. But on the other hand, what gives us the clarity and the clear vision, is -- if some of our pipeline conversions and things like that are there. Could you speak on some of those lines, please?
I think that most of these issues are covered in previous questions. But essentially, we did indicate growth in Q4 to be similar to the kind of growth rates we saw in Q2 and Q3. And that confidence is on the back of a larger pipeline, faster conversion, improved win-ability or improved win ratios for Mindtree, all of which is reflected in the good wins that we announced over the last two or three quarters. So that's what gives us [indiscernible] and confidence of finding our growth for Q4.
Okay, So your comment is [ specifically for ] Q4, is that true?
Like I said, the trend will continue even into the future as well, except that I'm not commenting on the growth rates beyond Q4. So the estimate of growth was more limited to Q4, but the underlying trends should obviously support us even going forward beyond Q4.
Next question is from the line of from Vaibhav Badjatya from HNI Investments.
So recently, we have seen that Google [ is finding some design ] problems in AMD and Intel chip, which the solution of which is going to have impact on [ security ]. So I wanted to ask the question regarding the sort of the -- in places where we manage the infrastructure on clients we have, does this likely to have an impact of the -- we have to provide for more [indiscernible] to clients and thereby have some impact on the profitability in terms of the division?
I'm not sure if you -- I understood your question right. But I think you're referring to some of the announcements from companies like Apple and other chip companies, where there was some [ problems with data ] chips, et cetera. That has no correlation or no implication to our business.
We'll take the next question from the line of Sandeep Shah from CIMB India.
Rostow, I think the question is in terms of the conversion of the pipeline into the deal awards as you have kept saying for the last 2, 3 quarters that the pipeline is at the historic highs. But when we look into the new business wins in this year as a whole or a 9-month, it looks like that it's likely to lag versus what we had in FY '17. I do agree, in FY '17, you had a couple of large deal wins. So I just want to understand whether you still believe the large deal wins are sporadic? Or there is a concentrated efforts for you to say that the large deal wins will continue going forward, which gives the new business, TCV, also a growing on a Y-o-Y, which also gives us a confidence in terms of a growth visibility beyond Q4 entering into FY 2019. So just your comments on the same.
The pipeline of large deals is growing. For example, this quarter, we won 7 deals, each of which was more than $5 million there. So I think the pipeline of large deals is growing for multiple reasons, including the fact that digital is becoming mainstream and customers are investing in larger digital projects and are extremely confident of Mindtree delivering those kind of transformative projects for them. Even this quarter, for example, I pointed out a new customer who is embarking on a enterprise-wide transformative digital kind of a program and has chosen Mindtree as the anchor partner for that. Even if you look at the run-the-business kind of work is still leading the large programs, so I don't think the pipeline is any problem. Closure will be, by definition, sporadic. Last quarter or maybe I didn't close anything, maybe last year we closed one and maybe next quarter, if all goes well we can close one there, et cetera. So closure of large deals will, obviously, depend on which quarter they get closed, our pipeline is continuously building up.
Okay. Yes, the second question is in terms of the margin, so I think this quarter's margin is at a 7 quarter high. So -- and you are also saying it would be maintained in the Q4. But just a long-term vision on the margin, you believe still there is a potential to increase it to the historic highs at the EBIT level of 15%, 16%, which we used to add, even 17% in FY '15? And what can lead to that kind of a margins?
So I don't want to comment on a particular range whether it is 15% or 16% or anything higher or lower. But more as a directional statement, I think we are completely conscious of the fact that our profitability is below our own comfort levels right now. All of which is logical and explainable, because we made investments. Sometimes, for example, 1 or 2 quarters our acquired entities did not do well, et cetera. So notwithstanding the fact that we have good reasons, there is still a deep desire to improve our profitability so that there'll be a continuous focus, both in terms of cost reduction, operational efficiency improvement and also better management of clients, better realization of prices, et cetera. So multiple factors are being worked upon to improve margins. Once we get to our own sort of mental comfort level, we will then reassess and say what's the future plan beyond that. But at this moment, I think the focus is on trying to improve profitability from where we are. And like we have shown, even if you look at Q1 this year or Q2 this year, in spite of the one-off of visa cost in Q1 or the employee restructuring cost in Q2, even in those kind of tough quarters, we still grew profitability. So it's beginning to sort of fall into place now.
Okay, okay. Just last thing on the BEAT, the U.S. tax reforms and Base Erosion and Anti-Abuse Tax, any comment where it will affect you positively, negatively or it will help us? And on the wage side, is there any balance wage inflation which is pending, which may come in the fourth quarter as a whole? And last thing, I think you have also exposure to insurance clients and in the U.S., I think, hurricane has led to a lot of financial impact for most of the U.S. insurance companies. So will that be a bit of a near-term concern for you?
Insurance was significant.
Yes, I'll first take the U.S. tax impact, Sandeep. The U.S. tax impact is not substantially a benefit or impact for us, but there'll be a benefit to us from the -- taking a tax credit in India. To that extent, there'll be some amount of benefits flowing through us in future. Otherwise, on the tax rate trend, there'll not be any substantial impact for us because they work on branch models. On the -- what was your...
BEAT provisions, BEAT provisions.
The BEAT, I'm -- just explain Rostow.
BEAT provisions.
BEAT provision doesn't have any major impact for us. Any amendment in the U.S. tax laws don't have any major impact on this, on the insurance space.
So what could be the effective tax rate we can actually model? The second question was on wage and the third question was on the insurance impact in the U.S. because of the hurricane.
There is no wage increment due for this quarter, other than an annual, a very, very small amount maybe there for some new joinees or someone, but that is -- there is nothing there for this quarter.
So effective tax rate, if you can give us some color for years after FY '18. I do agree, but just a range will help us.
Yes. It'll be between 24% to 26% there.
Okay, okay. And last question on the insurance, which I asked.
Currently, like I said, that we had one large insurance client for whom we had like massive amount of cash disruption given some of their business priorities there. But other than that, for the rest of our clients, we're currently not seeing any changes to their priorities, et cetera, because of any of the weather-related impact that the U.S. has seen over the last year, so not seeing that as a specific trend on a broader basis.
Next question is from the line of Dipesh Mehta from SBICAP Securities.
Just want to get sense about how we look calendar '18, whether we find calendar '18 to be much better than what we have seen in terms of overall demand [ tricks in ] -- at the beginning of calendar '17? Second question is about the employee cost, if we look, it seems to be more or less flat quarter-on-quarter despite salary are given during the quarter. So can you help us first quantify the impact? And despite employee addition, why it seems to be flattish? And, yes, if you can answer these 2.
So the employee cost in the quarter -- over the last 2 or 3 quarters have been a combination of, like you said that some inflows, promotions, wage hikes, et cetera, plus a lot of efforts to mitigate cost in terms of rationalization of the pyramid and so on and so forth. So that's how both factors work. I think we'll probably begin to see some amount of benefit also as some of the large digital programs have a larger offshore component, so that will also help us get growth in order to increase our wage costs there. And so that's the outlook that we have on wages.
Also in the beginning of the last quarter, Sandeep, there was a onetime restructuring people cost, which was not there this quarter. So that has also sort of decreased the employee cost this quarter.
So can you quantify the salary given this quarter? And -- or in terms of percentage, how much we have given? Because it seems to be very low impact, only 50 basis points what we quantified.
Yes. That's only the second round of salary increment that we gave. That's only for the selected people.
Very small selection of people were covered in this quarter.
And that's why it is only 50 basis points impact. The majority of the hikes happened in the previous quarter.
And how we look calendar '18, if you can help qualitatively?
Calendar -- overall, like I said, our impressions in terms of talking to customers, analysts, et cetera, are beginning to see, like I said, a strong demand environment and improved ability of Mindtree to convert that demand into enough business for Mindtree within our 4 verticals.
Yes. And last thing about the pricing, I think broadly we are suggesting of relatively stable pricing environment. But if I look [indiscernible] pricing, it is now almost, Y-o-Y, growing at double-digit kind of thing. And even if on-site, I think both the things, 8, 10 quarters back we used to see pressure on pricing in terms of on-site, [ offshore. ] But for last few quarters, it is steady uptick kind of thing. Can you help us understand what's going on in this? I understand about this quarter specific, you mentioned from transition to steady state kind of thing. But broadly, if you can help us understand how one should look pricing to be?
I think, broadly, pricing is remaining stable. Part of the move in this quarter was, like Jagan explained, a few large programs that we were running for clients, they completed the transition phase and moved into steady-state state, and therefore the realization improved because of it. A small amount was also because this quarter had lower working days, so on your fixed-price and on our fixed-price and fixed monthly kind of contract, you have a higher realization over a lower working days there. So some of those seasonal factors also played in. But I would say, broadly, the realized rates will remain constant going forward.
No, Rostow, even if, let's say, we exclude Q3 kind of number, even I go to Q2, our [ offshore ] pricing is showing mid-single-digit kind of growth rate trajectory.
So it's the same trend that -- we did not -- all of those transitions did not end on one single day, right? So it's a he beginning of a momentum that we are seeing. And to some extent is also a function of the fact that our offshore prices fell significantly, and we got a lot of, like, concern from the investment community on the phone. And now we are beginning to build that back.
Sir, whether automation or any other way it impacts your reported pricing?
No, because if we had done automation, et cetera, it will reflect in improved margins. Because pricing is a function of revenue divided by the effort, so automation will help improve margins, will not help improve revenues.
Next question is from the line of Apurva Prasad from HDFC Securities.
So Rostow, just to prod further on the margin side, again, when you said fourth quarter to be flattish. Now, should we really look at it from a slightly medium- to long-term perspective?
I think effort will be to increase it from where we are. Like I explained to -- in a previous question, we believe we are below our own comfort level, and we believe we need to do a lot to improve margin. So I think from a medium-term perspective, the effort will continue to improve margin, except that nothing is available for us to increase between Q3 and Q4. But on a going-forward basis, we will do a few -- we're going to work on all the levers available to us to improve margins.
Sure. And also within the client metrics, the top 10, was the growth largely secular? Or was that driven by a fewer pockets? So top account, obviously, did very well, but beyond that?
If you look at our top 10, many of our accounts in the top 10 grew. Just anecdotally, one customer dropped out of the top 10 from Q2 to Q3. But all the accounts that we ended in Q3, largely, many of them had very good growth.
We'll take the next question from the line of Pankaj Kapoor from JM Financial.
Just a small question, again, on the realization jump. You mentioned that this was because of the projects moving to a steady phase. Normally these kind of things happen in infrastructure or application outsourcing contracts. But if I see your numbers, IMS and as well as maintenance seems to be flattish. In fact, maintenance is down Q-on-Q. So I'm just trying to reconcile these 2 things with what we saw on the pricing and the comment that you made.
Pankaj, thank you for your wishes. That is absolutely logical. It is because we are delivering the same revenue with lower efforts. That's why the realized rates have gone up.
Sir, you're right. But normally, as I said, like these would be for contracts and the infrastructure management side or on the application maintenance side. But on those service lines, the revenues have been flattish quarter-on-quarter or has shown a very marginal increase. So I mean, I'm just trying to reconcile how the revenue recognition would have happened so that these 2 things can match.
Apurva, the -- sorry, Pankaj, we will have -- I think I have to -- I will take the -- your question off-line and give you an update on that.
Sure, sure. That's okay. And second thing is on the -- again on this part only that are most of these projects which had this transition phase, are they now done? And are all of them have achieved a steady state?
Sorry, Pankaj, the question was -- your voice was not clear, can you repeat your question again?
Yes. So what I was asking is that are most of these projects which we are transitioning, are we over with them? Or are some projects still in the transition phase, which can go into steady phase in the coming quarter?
Yes, I think largely over. A small percentage will complete transition during the course of Q4.
We take the next question from the line of Shashi Bhusan from Axis Capital.
Our 1 year executable is still weak. How we should interpret this? Some smaller deal that gets closed during the quarter and executed during the quarter do not get captured in this? Also, what else do not get captured in this number?
Everything gets captured in the number, so whatever contract is signed in the quarter are aggregated and then reported as per the breakup that we have disclosed. So nothing is left out. I'm not sure if I would call my less than 1 year to be weak. If you look at this quarter, for example, out of the $200-plus million, largest portion was contracts less than 1 year. Contracts larger than 1 year were some $30 million, $40 million. So therefore, we are reasonably confident about the [ top ] contracts less than 1 year in this quarter, last quarter and even over the last 1 or 2 quarters. For our size, I think that's a reasonable number of what we have.
No. So if I look at on a trailing 12-month and year-on-year change, it's -- it actually came down, so my problem is, how to interpret this data?
I think this is a -- reasonably, there are simple interpretations, right. If you look at last year Q3, for example, we announced the single largest deal in the history of Mindtree. So let's assume it was $100 contract. Now the $100 had a certain portion and this under that -- the contract is $100 over 5 years. So it's $20 of each, 1 year contract that got included in the less than 1 year contract correspondingly when we announced last year's numbers. So if I don't have such a contract this quarter, it will be different. Now next quarter or a quarter down the line, it will win more such business and it will obviously reflect. But if you look at overall, it's difficult to compare -- like how you're comparing, it's probably not the right way of comparing as well. Look at how much we are winning continuously and how quickly that is being reflected in the actual pickup in terms of reported quarterly numbers as well. So we announced these last year Q3 and it's starting to reflect in revenues from Q2 to Q3 of this year. So that's the trend that makes sense.
Rostow, no, very helpful. Another thing on deal pipeline perspective, which are the verticals that are seeing better traction or dominating the deal pipeline?
At this point of time, Technology, Media and Services and Travel & Hospitality has the strongest pipeline. Banking and Retail, CPG and Manufacturing, both have, I would say, medium kind of pipelines. It's probably good across all the 4, but Technology and Travel are slightly higher.
We take the next question from the line of Nitin Padmanabhan from Investec.
Now, sir, if you look at the margins, the cost of revenues are lower by 200 basis points quarter-on-quarter. I understand that 100 basis points is because of nonrecurrence of those restructuring costs. But this quarter, if I look at it, there's this gratuity and compensated absences, these 2 items put together is a decline of INR 14-odd crores, which is close to 100 basis points on the margin. I just want to understand this compensated absences, the decline that's been there, is it a sustainable number? And should that be something that leads into margins going forward or it's a sustainable number?
No, this is Jagan here, Nitin. The margin is at -- will be similar levels, that's what we have confirmed. But within this number, there'll be some changes because there are some sort of seasonal impacts coming into the numbers also. And also, like, our financial year, calendar year closures and the transfer of our policy, there may be some changes happening in this.
Sure. So the incremental leverage and margin, what -- if you could just give some color on what are the drivers that could actually sort of move the needle on margins to sustain it if this were to be a headwind going forward?
I think the compensated absences and gratuity, et cetera, are quarter-to-quarter kind of accounting estimate, and for example, the compensated absences in the actuarial calculations, so the actuary calculation terms and et cetera. So next quarter that may be a higher number, maybe a lower number, it's difficult to make a prediction on one single line item like that. Going forward, I think multiples of factors are giving us confidence on margins. One, clearly, revenue growth is the biggest driver like we explained in the past. For example, when more of our revenue starts coming in as programs move out of transition into steady state, then for similar cost structure you're sort of -- you're going to get higher revenues, so that's a big margin lever as one angle. But even otherwise, larger deal wins in digital, most profitability on digital deals, et cetera, all of which will also contribute to improvement in profitability. Finally, as our 2 acquired entities, Bluefin and Magnet, starts becoming breakeven, more stable growth, et cetera, so that's also a margin lever. Thirdly, the operational efficiency improvement, cost reduction programs, et cetera, that we have, there is a continuous amount of focus on those as well, so that's also a margin lever. So overall, I think we're doing multiple things to get margins back into our comfort zone.
Sure. That's quite helpful. The other thing I wanted to check was, this quarter almost 90% of the incremental revenues came from the top 10 clients. I was just wondering, going forward, do you expect a more broader sort of spread of the incremental revenues that will come through? And second is that the transition-related gain on pricing or on the revenue growth, is there a lot of that yet to come going into the next quarter and so on and so forth?
I think the transition-related benefit will be lesser in Q4 so as the large portion of those programs have completed with this quarter there. But overall, I can say, confidence on revenue momentum continues to be strong, both because of market attraction and also our own experience with customers increasing win rates, et cetera.
Sure. Sir, and just one last one. If you look at the -- your U.S.-based clients and your European clients, are you -- versus same time last year, where are you seeing a significant sort of change in momentum with reference to the demand environment?
I think there's a improvement in the demand environment overall between, say, geographies of U.S. and Europe, between verticals, et cetera. I think there's a lot more improvement in customer sentiment, willingness to make investments, taking larger bets on programs like digital. I think it's a broad-based kind of improvement that we are seeing amongst our customers.
We take the next question from the line of Rumit Dugar from IDFC.
Yes. My margin question has been answered, but...
Excuse me, this is the operator. Sir, may we request you to use the handset please?
Yes, am I audible now?
Yes, sir.
My margin question has been partly answered, but I just wanted to get some color specifically on the BFSI in retail vertical, what are the kind of trends that you're seeing there in terms of spending and particularly spending in new tech?
Okay. Let me take BFSI, first. Our experience has been that we had one large customer that went through a lot of kind of turmoil, and we had like a big IR challenge with that vertical last year. But it's made a very smart turnaround, great wins. If you look at Q3 last year, we announced a large win from a U.S. insurance company. Q2 this year, we announced a large win from another large credit reporting kind of a company, so many of our recent wins, especially in the run-the-business kind of programs have been in banking, so this year that vertical has done quite well. This quarter, also, that vertical grew approximately the same rate as the rest of Mindtree growth. So overall, I think our BFSI business has grown quite well. With one, I would say, a little bit of an interesting trend. We are seeing our BFSI clients being late adopters on digital, so more of our pipeline, most of our wins, most of our work has been more over traditional services kind of opportunities at the moment. Our Retail, CPG and Manufacturing vertical has probably been a leader for us in terms of pushing the boundaries on innovation and bring some of the most cutting edge kind of work in digital is happening in the retail CPG vertical for us at the moment, so that's the broad trends we're seeing in both these verticals.
Ladies and gentlemen, I would now like to hand the conference over to Mr. Sushanth Pai for further questions.
Yes. We'll just take a few webcast questions, Stanford. So one question has come on, why receivable days are going up over the last 3 quarters?Actually, as per the data, I think, receivables days have gone up slightly up in this quarter alone, from 64 to 71 days. But if you see the trend for the last few quarters, it's actually been very stable or improved. Like if you see in quarter 2 of the previous quarter, it has actually been 64. The previous quarter was 57; before that it was 65 and then it was 71. So I think I don't think it has increased, but it's been stable, and some quarters we have improved and some quarters that has been stable. So I don't think that's gone steadily up over the last 3 quarters.The next question is, is there any onetime in depreciation for the quarter? There is no onetime in depreciation for the quarter. The tax rate outlook for the next year, I think Jagan just mentioned, it's about 24% to 26% for the next year is what we think. Loss of a $10 million bucket client, yes, there has been one client, which has come down because of a slight ramp down in one of our clients. The $10 million bucket has come down. And any decline in expenses, I think, the explained margin was -- so in this quarter, we've had an operational improvement of about mainly 180 basis points because of some projects moving from steady state to transition state. And so that's one of the main impact. And we also had some SG&A leverage because of the growth of 130 basis points. I think these 2 were key reason for the decline in expenses or improvements in margins.And the last question is, why deal win -- why now deal win seems to be a...
New deal wins.
New deal wins seems to be a little soft? So...
The main reason for that is, Q3 typically tends to be a seasonally weak quarter for new wins. Back to you, Stanford.
Thank you, sir. Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Sushanth Pai for closing comments.
Yes. Thanks, Stanford. Thank you all for joining this call. If you have any further questions, please do write to us, and we can get back to you. Thank you, once again.
Thank you very much, members of the management. Ladies and gentlemen, on behalf of Mindtree Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.