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Edited Transcript of MINDTREE.NSE earnings conference call or presentation 20-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 MindTree Ltd Earnings Call

Bangalore Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of MindTree Ltd earnings conference call or presentation Thursday, April 20, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jagannathan Chakravarthi Narasimhan

MindTree Limited - CFO, VP and Compliance Officer

* Krishnakumar Natarajan

MindTree Limited - Co-Founder and Executive Chairman

* Rostow Ravanan

MindTree Limited - CEO, MD and Executive Director

* Sushanth Pai

MindTree Limited - Chief Risk Officer and Head of IR

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Conference Call Participants

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* Aniket Pande

* Apurva Prasad

HDFC Securities Limited, Research Division - Research Analyst

* Ashish Chopra

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Gaurav Rateria

Morgan Stanley, Research Division - Research Associate

* Madhu Babu

Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst

* Manik Taneja

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Mohit Jain

Anand Rathi Financial Services Limited, Research Division - Analyst, Technology

* Mukul Garg

Haitong International Research Limited - Research Analyst

* Nitin Padmanabhan

Investec Bank plc, Research Division - Analyst

* Sandeep Shah

CIMB Research - VP

* Shashi Bhusan

IDFC Securities Limited, Research Division - IT Analyst

* Shekhar Singh

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Mindtree Limited Results Conference Call for Q4 FY '17 and for the year ending 31st March 2017. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Sushanth Pai. Thank you, and over to you, sir.

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Sushanth Pai, MindTree Limited - Chief Risk Officer and Head of IR [2]

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Thanks, Aman. Welcome to this conference call to discuss the financial results for Mindtree for the fourth quarter and year ended 31st March 2017. I'm Sushanth, Head of Investor Relations. On this call, we have with us the senior management team, Rostow Ravanan, CEO and Managing Director; Parthasarathy N.S., Vice Chairman and COO; Jagannathan Chakravarthi, CFO; and Ramesh Gopalakrishnan, Global Head of Delivery and Operations.

The agenda for the session is as follows: Rostow and Jagan will begin with a brief overview of the company's performance, after which we'll open the floor for the Q&A session. Since we have introduced an audio webcast, some of you may have joined the webcast. (Operator Instructions) Please note that this call is meant only for the analysts and investors. In case there's anyone from the media, I 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 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.

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [3]

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Thank you, Sushanth. Good evening to all our friends of the financial community. Happy to share that our FY '17 revenues have grown by 11.2% in constant currency, which exceeds the industry estimates of 8% to 10% for FY '17. In reported terms, we have grown 9.4%, which means this financial year also we have been amongst the leaders in terms of growth in the Indian IT industry. The financial year also marks completion of 10 years from our IPO in March 2007. I wanted to thank all our investors, analysts and well-wishers for their ongoing support in this journey. We are very satisfied and happy with the foundation we have created, which has enabled us to succeed even in the times of adversity. Some key achievements over the last decade. Our 10-year CAGR in dollar terms has been about 20%, which means we have outperformed the industry, and we are now the seventh largest IT company in India. Value of 10 shares invested in our IPO has gone up from INR 4,250 to INR 18,120 as of 31st March 2017, which is about 326% value creation for our shareholders.

As a born digital company, our focus has been to help our clients with their technology transformation initiatives, both for to run their business as well as change their business programs. One of our largest investments to date is Mindtree Kalinga, our Global Learning and Delivery Center, which we believe will be a game changer to build the engineers of tomorrow. More than 2,000 people have graduated from this campus, since it was set up in early 2015.

Now some highlights of the quarter. For the quarter, consolidated revenues were $195.6 million, which is a growth of 1.8% sequentially and 0.3% compared to the previous year same quarter. On a constant currency basis, revenue grew by 2% over the previous quarter. Q4 has been the best quarter in FY '17 in terms of constant currency growth. We have highlighted our efforts to change the strategy of employee execution in our subsidiaries. Happy to report that those efforts are yielding results. Bluefin grew at 11.1% sequentially over the previous quarter and Magnet 360 grew 4.8% over the previous quarter. Amongst the verticals, BFSI was the best performer for this quarter, which grew by 4.1%. Technology, Media and Services grew 3.9%. Retail, CPG and Manufacturing was the only vertical which had a slight decline. For the full year, Technology, Media and Services was the best-performing vertical with 16.5% growth, followed by RCM, BFSI and Travel & Hospitality.

Amongst the geographies, U.S. grew 3.4% and Europe grew 2.1%, with a constant currency growth of 2.6% for our European business. Digital business grew 2.4% quarter-over-quarter. And on a full year basis, Digital grew 18.3%, which is a reflection of our strong capabilities in digital. IMTS was also a high performer for this year, which grew by 23.5% in FY '17 compared to FY '16.

We made significant progress on the attrition front. Trailing 12-month attrition has reduced to 15.1% compared to 16.1% in the previous quarter. Quarterly annualized attrition is at 13.2%, which is the best ever since 2014. We've had some strong multiyear multimillion dollar wins, including building a unified digital experience platform for a leading healthcare insurance company, providing management of its services for multiple applications to a global leader in the computer software and technology industry, transforming core business processes using Duck Creek and SaaS products for a leading automotive insurance company, application maintenance support on SAP S/4 HANA Suite on cloud for an industrial equipment distributor and many more.

In terms of outlook for FY '18, we are very confident of the demand outlook for FY '18. We've had a good deal closures worth -- of orders worth $209 million in Q4, coming on the back of very strong deal wins in Q3 as well. Out of the deal wins in Q4, $135 million were renewals and $74 million was new orders and $50 million contracts for the quarter were digital business contracts. Orders for less than 1 year were $182 million and $27 million is for greater than 1 year.

The market environment in front of us is quite dynamic due to the technology disruptions, global economic conditions and geopolitical volatility. Due to these factors, some of our large customers continue to see business pressures and some of their technology initiatives are being curtailed. Our focus is on deepening relationships with some of the key customers in this segment and make stronger inroads using emerging technologies. Some of our customer relationships beyond the top 10 have yielded good growth and, consequently, the top 10 that we are exiting the year today is not the same top 10 that we entered the year with, which means that composition of our top 10 has changed.

Keeping all of these factors in mind, we expect that FY '18, Mindtree will grow at low double digits, which should, again, put us at amongst the leaders in terms of growth in FY '18. Our leadership team is fully aligned to create growth and execute on this strategy. Scott Staples, one of our cofounders, has left Mindtree to pursue other opportunities on a very amicable basis and continues to be involved in certain areas with Mindtree, including being a member of our Customer Advisory Council. All the industry groups heads, all the vertical heads will consequently report to me, which will help me remove one layer between me and the customers. Scott will also continue to work with Mindtree as a member of our Board of Magnet 360, which is our Salesforce practice, and help grow the Salesforce practice to even greater heights.

Now let me pass on to Jagan for some other financial highlights.

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [4]

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Thank you, Rostow. I will first start with updates for the quarter. This quarter, fee revenue grew by 2.1 percentage with volume increase of 2.2 percentage and price realization drop by 0.1 percentage. EBITDA for the quarter improved by 70 basis points to 14.2% compared to 13.4% last quarter. The -- this was mainly possible because of some cost savings, which helped us to save about 1.9 percentage. This was little bit offset by drop in utilization and increase in people cost, which had an impact of around 1.1 percentage. The PAT for the quarter was 7.4% compared to 8% last quarter, and EPS for the quarter was INR 5.77 per share compared to INR 6.13 per share last quarter. The drop impact as well as in the -- and EPS was mainly due to ForEx loss in this quarter. We had a very successful reach for our DSO, which was around 65 days with strong free cash flow and cash flow to EBITDA was also very strong.

The Board of Directors in its meeting held at -- on March 27, 2017 has recommended for an interim dividend of 20 percentage, INR 2 per share, and in their meeting held on April 20, 2017 has recommended for a final dividend of 30 percentage, which is INR 3 per share.

Some points on margin outlook for the next year. Improving margins is one of the key priorities for financial year '18. Based on the revenue growth indicated by Rostow, our continuous focus on operational efficiency initiative, we expect margins of financial year '18 to be better than financial year '17. Tight integration of subsidiaries will add to this effort of improving the margin. Some of the key points to be considered are: We will have only one salary cycle increment, which will have an -- which will be effective from July 1, 2017. The levels of increment will be decided during this quarter. We plan to hire about 1,200 campus graduates for financial year '18. We expect to incur $1.7 million towards visa cost in financial year '18. This will be slightly lower than the visa cost we incurred in FY '17. ETR for financial year '18 will be 25 percentage to 26 percentage, a slight increase due to some facilities entering into 50% tax bracket.

With this, I conclude my financial updates for the quarter.

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Sushanth Pai, MindTree Limited - Chief Risk Officer and Head of IR [5]

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Aman, we can now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have the first question from the line of Mukul Garg from Haitong Securities.

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Mukul Garg, Haitong International Research Limited - Research Analyst [2]

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Rostow, my first question was on FY '18 outlook. You have guided for a low double-digit growth. So is that because of any improvement in demand environment in your key clients? Or are you seeing any improvement in the top client group, which suffered in last year?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [3]

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Mukul, Rostow. I think it's a combination of a few things. At one level, it's the very strong deal wins we had in Q3. If you remember, we reported more than $300 million worth of deals we signed in Q3, of which about 60% were new wins, over 40% was renewal and about 60% was new wins. Similarly, this quarter as well, we had very good deal wins of more than $200 million. So overall, it's on the back of strong deal closures over the last 2 quarters as well as strong pipeline that we have [ in the industry ] with us as of today. So overall, it's the reflection of wins and pipeline that gives us the confidence for next year. If you leave the tactical quantitative line of our view, I think the other reason why we are extremely confident is that our customers as well as the market is telling us that the strategy that we had outlined, in terms of helping our customers in both to run their business as well as the digital kind of technology transformation initiative, is resonating well. The domain knowledge as well as the technology expertise that we had from a strategy point of view, that is also connecting well with the market. That's also qualitatively the reason why we believe we're confident of a double-digit growth next year.

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Mukul Garg, Haitong International Research Limited - Research Analyst [4]

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Sure. And just following on to that, Rostow. So any improvement in the environment at top clients, especially the -- beyond the second to 10 bucket which suffered last year? Have you seen issues -- are these issues over now? Or do you expect them to continue for other 1 or 2 quarters?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [5]

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Frankly, no answer to that question. Like I explained in my comments, I think the customers who are closing as a top 10 customers on 31st March 2017 are not the same who were in the top 10 on 1st April 2016. So there has been a churn in our top 10 customers. There were a few customers with whom we have very warm relationships, but their business is going through trouble. So their technology spend have been curtailed, and consequently, some have moved out of the top 10 versus some of our other customers who historically may have been in the 11th or the 12th or between the 11 to 30 kind of bucket of our customers, with whom our initiatives to mind those relationships deeper, has done well. So they have entered the top 10. So I think the top 10 as a percentage of revenues will be a little uneven between quarters. Because there are a few customers who are doing badly and, therefore, they are going out and some new customers are entering into the bucket. So that number will be a little uneven for the next 1 or 2 quarters.

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Mukul Garg, Haitong International Research Limited - Research Analyst [6]

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Fair enough. And one final question to Jagan. If you can help us understand the margin levers to focus on FY '18, especially given the recent appreciation in INR, you are still expecting margins to improve from FY '17.

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [7]

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Well, just to update you, I'm not commenting about the backdrop currency fluctuations in the margin update whatever I have given. We have continued to focus on operational efficiency, like utilization, rate increase and on-site offshore mix of revenue. There are enough of levers available for us. Apart from that, the integration of the acquired entities also will help us to improve the margin. So with this -- with the levers available, we are very confident of improving the margin. Just like we -- if you see last 2 quarters, we have continuously increased the margins quarter after quarter.

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Operator [8]

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We have next question from the line of Aniket Pande from Elara Securities -- I'm sorry, Elara Capital.

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Aniket Pande, [9]

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I have a couple of questions. The first question was, there was a slight decline of around 5% in Retail segment. So is this decline due to the structural changes going on in retail sector or some other reason? And second question was, any guidance on your utilization level from where it will hit ahead?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [10]

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This is Rostow, Aniket. I think the decline in Retail was a little bit only for the quarter. I think on a full year basis, Retail has grown. We are seeing some mixed feedback from some of our existing clients. On the other hand, we are also seeing some new customers where deals are getting closed, projects are getting started. So it's a little bit of a mixed feedback. At this point of time, I'm treating it as a one quarter trend and, therefore, I want to watch how the next 1 or 2 quarters turn out before we can make a little bit of a more confident prediction for the industry as a whole for Mindtree. Coming to utilization, I think as we grow, maybe over the next 2 or 3 years, trying to get another 2, 3 percentage points improvement in utilization. Currently, we hover between 70 and 72 between different quarters. I think that will go to maybe 73, 74. But it will be a journey. It's going to take a few years before we get there. So that change will happen as we become larger. And I also want to point out that within the industry, different companies have different definitions of utilization. Our definition of utilization is probably amongst the most stringent. So the theoretical max utilization, as per our definition, is about 85%. So it is not very far away -- is not very inefficient in terms of where we are right now.

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Operator [11]

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(Operator Instructions) We have the next question from the line of Manik Taneja from Emkay Global.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [12]

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I basically had a couple of questions. Historically, your margin outlook essentially has been based on a constant currency basis. So does that hold true this year as well? That's question #1. The second question was that in the recent quarters, one has continue -- one has seen a significant pressure on offshore realization for us. If you could give us some sense on how are you looking at that metrics going forward?

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [13]

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Manik, thanks for your question. The margin outlook what we have given is on constant currency basis. We have not considered the currency fluctuations what is happening in the market now. Coming to this offshore realization, we have taken a lot of initiatives to improve the offshore component of the revenue and also utilization in the offshore level. And wherever the contract rates have to be renewed or increased, wherever possible, we can do. We are taking initiatives for that also. So it is a conscious effort and our efforts have started showing some results in some places, and it will take a little bit more time for us to have a significant impact on that.

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Operator [14]

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We have the next question from the line of Madhu Babu from Prabhudas Lilladher.

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Madhu Babu, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [15]

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Sir, for us to get into the double-digit growth, we would require around 4% [ C2GR ]. So are we expecting a strong start for FY '18? So the first 2 quarters are we looking at 4% to 5% quarter-on-quarter growth?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [16]

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I'm not commenting on the calculation per se, Madhu. But yes, we are expecting a strong start to the year.

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Madhu Babu, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [17]

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So that large insurance deal which we closed in 3Q, so that will ramp up -- I mean that revenues will kick in 1Q. Is my assumption right?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [18]

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More than one deal. Like we said, Q3 was a very strong and our all-time best of deal closure of about more than $300 million. Q4 also had very strong deal closures. So many of these have started to yield revenues.

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Madhu Babu, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [19]

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Sir, and second thing on the margins, could you give us the outlook for the subsidiaries, I mean Bluefin as well as Magnet? How are the margins there? And other thing is that headcount, last year we have seen almost very muted net additions. So next year when we do hiring, I mean how will you margin the expand, I mean, overall, the picture?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [20]

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Two subsidiaries, Bluefin and Magnet, are continuing to do better. You should realize that it's primarily a very high-end consulting business, which means it has a high fixed cost in terms of people cost. And as revenues start coming back into a growth mode, the business goes into a reasonably quick profitability mode as well. But driving margin improvements in Bluefin and Magnet is one of the margin levers for next year. And as far as people addition goes, it's a combination -- while, obviously, we will do people additions in a -- or we expect to do people additions based on revenue projections. And based on business outlook at the moment, profitability levers factor that in, but we also have a few operational levers as well as overall growth as a profitability driver. All of those should lead to margin improvements for next year.

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Operator [21]

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(Operator Instructions) We have the next question from the line of Dipesh Mehta from SBI Capital Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [22]

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I just wanted to get more color about FY '18 outlook. You -- typically, we see Q3 and Q4 is relatively softer quarter because of seasonality in terms of what we have observed in the past. Do you expect any different behavior in FY '18, considering the changing business mix and other things?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [23]

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Difficult to tell, but like we have explained before, Dipesh, we don't give guidance. So the only thing which we can say is that year is expected to start strong based on the deal wins you've had in Q4 and Q3 as well as the pipelines that we have as of today.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [24]

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Okay. And in terms of the margin side, can you help us understand, I think in constant currency, you suggested margin to be better than FY '17, and I think you highlighted also some of the factors. But my question is about margin profile of Bluefin and other thing. You said revenue is one of the major factor, so how you see growth coming back to Bluefin and specifically, related to geographical kind of issue, which we have seen in Bluefin because of U.K. Brexit and other things?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [25]

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So both businesses are seeing good growth momentum in the recent past, which are very good results for Q4. Continue to see strong traction in pipeline for both the businesses. Also we have, I would say that have changed our strategic priorities for the business. Like you outlined, there are some challenges within U.K. So for example, the Bluefin business is spending more efforts to win business in the U.S. So there are some deliberate steps that we have taken to be able to bring both the businesses back into a success mode.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [26]

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So do you think now the challenges, which we faced in some of the acquisitions, are behind us?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [27]

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Difficult to tell. Like I said, again, coming back to the point, we don't give guidance. We also realized that the world is a very uncertain place right now. So we expect to start off on a good year -- expect to start off the year on a good note and continue sort of push and do the best we can for our customers. That's the best we can share at this stage.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [28]

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Last thing is, can you provide your comments about the -- vertical-wise, how you expect demand environment?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [29]

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Overall, I think all the verticals are probably seeing a good pipeline and good momentum in front of them. Different verticals are seeing different trends. For example, Travel, CPG, et cetera, are more focused on emerging technologies like Digital. Sectors like BFSI, more of the demand is coming because of their cost-reduction kind of initiatives. So the nature of demand is different, but I think we are quite positive. We have seen positive momentum across all the 4 verticals.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [30]

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Okay. So in short, you expect all the vertical to grow more or less evenly next year?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [31]

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All the verticals will grow. Evenly, we'll get -- we'll see how the year shapes up.

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Operator [32]

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We have the next question from the line of Sandeep Shah from CIMB Securities.

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Sandeep Shah, CIMB Research - VP [33]

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Just wanted to get a color that there are few clients within your top 20 or top 15 list where there were some client-specific issues. So just wanted to know most of those issues are behind? I do agree some of the clients may churn, but whether those issues with those specific accounts are behind?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [34]

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Not yet. Some of the ones that we are going through some business challenges, I think, may take a little bit more time before we can see any confidence in some of those accounts. And we are continuing to monitor it and continue to derisk it as well.

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Sandeep Shah, CIMB Research - VP [35]

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Okay. And just in terms of margin outlook which we have said, so do you believe that the tailwinds, which we are looking at through cost optimization, constant currency, would be enough for looking at the rupee appreciation, assuming the current spot rate continues for the next year? Because it looks like that the headwind could be as big as 120, 130 bps on the margin through currency for the coming year.

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [36]

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We're not making any comments on currency and the impact of currency at this stage, because you have seen currency can be extremely volatile. For example, in February, I don't think anybody was predicting the rupee to reach this level on 31st March. Similarly, for example, God knows what the rupee will do on 31st May, sitting where we are in the middle of April. So I think we'll leave the currency-related factor aside. On an operational basis, we are extremely conscious, and we need to do better on our profitability. A few things are already being activated and few more things are also being planned and will also be implemented to help us improve our profitability.

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Sandeep Shah, CIMB Research - VP [37]

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Okay. And do you believe that these large deals, which comes to a ramp-up stage, there would be a large deal transition-related cost plus there could be some investment required for the on-site location looking at the ongoing debates on the visa regulation? Do you believe those would be new headwinds for FY 2018?

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [38]

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This is Jagannathan here. Just to update you, we have to wait and watch on what is happening -- developments happening on immigration. We will be able to make an assessment about the cost implications only after we know the details -- much more details on that. Coming to this -- what was the other question?

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Sandeep Shah, CIMB Research - VP [39]

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On the large wins.

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [40]

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On the large wins, we are not expecting any additional cost to come. We have factored in what is required for the transition, Sandeep.

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Operator [41]

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(Operator Instructions) We have the next question from the line of Ashish Chopra from Motilal Oswal Securities.

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Ashish Chopra, Motilal Oswal Securities Limited, Research Division - Research Analyst [42]

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Rostow, just to get the comment on your top clients correct. So you mentioned that obviously in the last year there would have been some churn in the top 10 accounts. But are you also saying that such a churn may continue into FY '18 as well, if we go by the positioning of respective clients?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [43]

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No. What I meant is the constitution of the top clients has changed. Those that having challenges, some of them have dropped out of the top 5, some may even have dropped out of the top 10, some new companies have entered that bucket, et cetera. The ones that are in the top 10, I would say, are reasonably likely to go through and maybe have some positive momentum for us. But the top 10, as a whole, will obviously -- the percentage of top 10 as a whole will be uneven, because it's a different top 10 compared to the old top 10. So maybe one quarter there will be growth, one quarter there will be high growth, one quarter there will be low growth, et cetera. So it will be an uneven picture when you look at the top 10 bucket as a whole. Individually, within the accounts, some of the accounts which had trouble are probably stabilizing and improving. Some of those accounts which were in trouble will probably still continue to see some challenges in front of them. So it's little bit of a mixed picture and -- that we can only explain on an account-by-account basis.

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Ashish Chopra, Motilal Oswal Securities Limited, Research Division - Research Analyst [44]

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Got it. And just lastly from my side. So there has been -- there have been a few exits in the top leadership in the last year or so at Mindtree. So heading into FY '18, would you see the top leadership team completely in place? Or would you be looking at filling up a few gaps that would still be work in progress?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [45]

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We definitely made some progress. For example, some positions have been filled with external talent, like [ Balaji Thirumalai ], who joins us to head the Technology, Media and Services vertical. Some have been filled with internal talent, for example, Anil Gandharve has taken over the Head of Retail, CPG and Manufacturing, et cetera. So that's an ongoing process. We are extremely proud of the large leadership wins that we have. In some cases, any churn that happens will be met through internal talent, and some cases, talent will also get rotated to take on additional responsibilities. And in some cases, we'll also get in external talent as well. There are a few open positions and search is on to help us find world-class talent for those positions. So that's the picture of the talent front.

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Operator [46]

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We have the next question from the line of Shekhar Singh from Excelsyor Capital.

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Shekhar Singh, [47]

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Sir, just wanted to know like for the year, as a whole, that is for FY '17, since there has been a sharp drop in margins, can you say like what were the key factors which caused the drop for the year as a whole? And which of these factors are going to improve in FY '18, because of which we are expecting some margin improvement? And to what extent can we recoup the loss of margins which we saw in FY '17?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [48]

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Shekhar, I think it was a combination of factors that we have been explaining every quarter over the course of the year. There were, for example, one of the largest was the impact of the 2 acquisitions that we have done, Bluefin and Magnet. Given that they are very consulting led, high-fixed cost kind of businesses and they have revenue pressures for various reasons, for example -- our margins dropped significantly in their businesses. For example, in Q3 and in Q4, both those businesses reported a loss. So some of those margin profile of the acquired entity is being lower and some of them going into a negative EBITDA because of the market pressure. So that was a one reason for the drop-in profitability. Second, I would say major reason for the drop-in profitability is the kind of new wins that you had in the previous year was on-site oriented. So that was the other reason for our drop-in profitability. And quarter-to-quarter, there are a few things. For example, in some quarters we had increments. In some quarters, we had visa costs, et cetera. So it's -- on an overall basis, those are the 3 or 4 reasons for drop in profitability in FY '17. Many of those that are work in progress and the things are beginning to turn around. Like I said, for example, Bluefin and Magnet, are seeing very strong growth, so that should lead to improvement in profitability. So some operational cost-reduction kind of initiative, some of those should also lead to improvement in margins. So a combination of things is also being done to be able to get margins back to a stable state. What we can assure you is that we are conscious that our margins, at the moment, are below our own satisfactory level, and we are working -- we are doing the best that we can to help address the margin question.

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Operator [49]

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We have the next question from the line of Mohit Jain from Anand Rathi.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [50]

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Sir, first is on ForEx loss. So what went wrong specifically in this quarter? And is there any expectation for FY '18 as well, given the quantum of loss you had in 4Q?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [51]

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I think on FY '18, it will be a difficult to comment because it depends on how the rupee-dollar goes during the course of the year. For FY '17, like we explained in the beginning of the call, we had debtors that -- where revenues, which were booked during the course of -- maybe the end of Q3 and beginning of Q4, which were at rates higher than the rate at which the rupee ended on 31st March. So restatement of those debtors was what lead to the ForEx loss. So to that extent, there was no mistake by Mindtree.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [52]

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Okay. But receivables were not high compared to what you used to do, as of first half FY '17.

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [53]

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It was fairly simple equation, Mohit. On 31st January, we have raised an invoice and that prevailing rate on 31st January was INR 67.1, for example, then the debtors would have been booked at INR 67.1. On 31st of March, if that invoice has not yet been collected, that debtors will be restated at INR 64.1. I'm just using an example. So a INR 3 FX loss. So even the quantum of receivables is not the issue, the rate at which the receivable was booked and the rate at which the receivables are restated on the closing date of the period that is the one that's leading to the loss. It's a fairly simple straightforward accounting process.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [54]

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Okay. Second one on your drop in on-site rate for this particular quarter.

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [55]

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Little bit of it is anecdotal. It's a very small change. Little bit of it is some of our newer wins in Magnet and Bluefin given a lower rate. But I would wait to see 1 or 2 more quarters before we can see is it a long-term issue or maybe just one-off for the quarter.

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Mohit Jain, Anand Rathi Financial Services Limited, Research Division - Analyst, Technology [56]

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Last is on your margin guidance. So you said constant currency, so this is as of -- like what we should we assume, 31st March or FY '17 averages what you are assuming for FY '18?

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [57]

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This is FY '17 average, Mohit. We can't take it with 1 date of rate. So it is just an average of FY '17.

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Operator [58]

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We have the next question from the line of Shashi Bhusan from IDFC Securities.

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Shashi Bhusan, IDFC Securities Limited, Research Division - IT Analyst [59]

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I have 2 questions related to deal wins. Any reason why digital win -- Digital deal wins have fallen in FY '17 on a Y-O-Y basis? Is it some company-specific or staff or environment-led or more temporal in nature, you should not read too much into it?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [60]

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I would say it's a little bit environment related, given, obviously, all the global uncertainties. Customers are changing their priorities. Part of it is we are beginning to see the trend where while you're right as the deal wins are uneven between quarters, the size of individual Digital deals is continuing to go up. So maybe they're going through additional levels of approval, additional levels of scrutiny by different stakeholders, additional sales cycles, time, et cetera. So it's something we are monitoring. Difficult to currently call it a trend out of this. However, the year as a whole, Digital has grown significantly ahead of Mindtree. Digital grew approximately 18%, whereas Mindtree grew 9.4%. So it continues to be one of our fastest-growing segments and an absolute sweet spot for Mindtree.

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Krishnakumar Natarajan, MindTree Limited - Co-Founder and Executive Chairman [61]

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Can I just add one thing? Shashi, this is KK here. So one of our key process Digital is also to see how we increase the size of the deal. And if you have seen quarter 3, we did talk about a largest digital win, which is in the $18 million, $20 million range and this quarter also, we had a larger win. So consciously also we are trying to say that while there could be easy pickings of smaller deals which are very on-site centric-oriented, it's also our effort to try and see we move to larger digital deals, which are more multiyear in nature. So that transition certainly has an impact in terms of maybe the number of wins, but we think on the long term, this is probably far more a better solution for us. The other thing which we are also consciously focusing on is, even if the discretionary deals were smaller deal size, can we make part of that get delivered out of offshore, which is again work in process. So I think there are fundamental ways in which we are trying to see how do we make Digital more predictable, how do we make it in a mix of both on-site offshore model. And while we're doing this transition, yes, there will be some bit of bottlenecks which increase.

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Shashi Bhusan, IDFC Securities Limited, Research Division - IT Analyst [62]

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Sure, sir. And -- that was very helpful. And second one, again, on the deal side. Our overall deal win for FY '17 is -- was in mid-single digit, which was lower than the last 2 years and also the order executable in FY '18 is, I think, weaker than what it was in the last year. So what is driving the confidence of double-digit growth in FY '18?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [63]

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I think, like we mentioned, partly it's a question of strong deal wins, partly it's a question of -- it took a little bit of time for us to grow new accounts to offset some of the decline in our -- some of our large previously top 10 customers, et cetera. Some of you -- some of those challenges have started to turn around and stronger growth momentum on both Bluefin and Magnet. So combination of all of these are one reason as well as continuingly sort of more bullish on the pipeline that we are building up. Ever since, I would say, maybe September, October timeframe onwards, pipeline is continuously picking up, and we are winning very large opportunities as well. So all of those are the reasons why we are confident of a double-digit growth in FY '18.

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Shashi Bhusan, IDFC Securities Limited, Research Division - IT Analyst [64]

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Just last one from my side and then, I will see the floor. Any risk we see in decision-making due to U.S. election, sorry U.K. election? Did we factor that in our guidance?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [65]

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No. I think that's happened yesterday or a day before yesterday or whatever. So I'd like to be real-time as you're pointing out to be, but unfortunately, I think they -- we haven't heard anything back from our customers because of that. But on a more serious note, on a broader basis, I think many of our clients and correspondingly, therefore, our own business is willing to deal with multidimensional volatility. And we're also consciously, like I said, we are looking at more than one geography, more than one sector to handle some of these things. So that's also a reason why we are confident about FY '18 growth. And then finally, I think in spite of, I would say, multi-challenge -- multilevel challenges, FY '17 is still declared a 9.4% growth on reported currency terms, which is almost, I would say, double-digit growth for all practical purposes or 11.2% on a constant currency basis. So our feeling is if -- even in very, very turbulent times, Mindtree continues to be growing ahead of the industry, and we think that trend will continue even into the future.

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Operator [66]

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I now hand the conference over to Mr. Sushanth Pai for taking the webcast questions. Please go ahead, sir.

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Sushanth Pai, MindTree Limited - Chief Risk Officer and Head of IR [67]

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Thanks, Aman. Rostow and Jagan, there has been a question from the webcast. In the last quarter, we articulated some points on our capital allocation. So there is a question on any update on the possibility of share buyback that you mentioned last quarter?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [68]

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I will take that. This is Rostow. I think we didn't specifically say yes or no to any particular instrument. All we mentioned was, given both the regulatory environment as well as the market conditions, we are evaluating multiple options for capital allocation. Some of those are now continuing to sort of being evaluated. Haven't reached any conclusion as yet. Part of the reason why we are waiting is that, currently there is an application pending before the regulatory authorities for merging 2 subsidiaries into India -- 2 subsidiaries into Mindtree, and some of these newer methods cannot be implemented while those kind of merger approvals are pending. So you have to wait to hear back from the regulatory authorities on some of those processes. And at the right stage, then the Board will evaluate newer options and go back and make an announcement. At this point of time, all I can say is, all options are being considered. No decisions have been taken as of today.

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Sushanth Pai, MindTree Limited - Chief Risk Officer and Head of IR [69]

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Thanks, Rostow. Aman, we can take the questions back to the call.

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Operator [70]

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We have the next question from the line of Apurva Prasad from HDFC Securities.

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Apurva Prasad, HDFC Securities Limited, Research Division - Research Analyst [71]

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Just wanted to check now with shuffle in the top 10 accounts that you talked about, do we now expect the top 10 to grow closer to company average? That's one. And also how's the -- based on the last 2 quarter deal wins, I mean, how different are the margin profiles in it?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [72]

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Like I mentioned earlier, Apurva, I think the top 10, as a percentage, I think will be uneven. Maybe one quarter, it will grow higher than the company average, one quarter it maybe a little lower than the company average. Because there is some churn in the accounts and there's some unevenness in the way we are seeing growth in some of our large accounts. So it will be a combination of some of our large accounts growing plus some of our new accounts will now start becoming large for us as well. So all of those lead to a little bit of unevenness in the growth pattern of our top 10 accounts. That's the picture in front of us at this stage.

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [73]

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Margins profile.

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [74]

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These new wins are coming at reasonably close to the similar margin profiles of what we have. No major, I would say, trend of improved pricing or lower pricing on an average. Obviously, I can't comment on a deal-by-deal basis. But as a portfolio, I'm not seeing anything dramatically different from our existing average.

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Operator [75]

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We'll take the last question from the line of Gaurav Rateria from Morgan Stanley.

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Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [76]

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Rostow, 2 questions. Firstly, the clients where you continue to see some challenge, are they within your top 10 clients and which segments would they be mostly pertaining to?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [77]

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I think I tried my best to cover this in previous questions as well. There are 2 dimensions here. There are some accounts that we started the year as our top 10. Some of those are no longer top 10 for us, meaning those customers had business pressures, and, therefore, their technology spends were getting impacted. And therefore, their spend with us was also getting impacted. And therefore, they are no longer in our top 10. Somebody else who was not originally in the top 10 has grown and become in the top 10 right now. But the accounts specifically which had challenges, a few are out of those challenges, few continue to be. But they are at cross-section of both geographies, between both U.S. and Europe, and also across different verticals. Maybe one of them is in Digital Services, one of them could be in Retail and so on and so forth. So it's across geographies, across verticals in terms of some of our large customers going through budget pressures.

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Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [78]

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Sure. Sir, you talked about pipeline growing building up from September, October timeframe. Is there any quantitative of these things around how much has the pipeline rolled in the last 6 months?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [79]

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Continues to grow, continues to be very, very -- I would say, we are very satisfied with the pipeline. We just don't disclose pipeline details. I can't, unfortunately, share specific number with you, but it continues to grow really well.

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Gaurav Rateria, Morgan Stanley, Research Division - Research Associate [80]

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Sure. Sir, last thing, any color on profitability of the subsidiaries, Bluefin and Magnet 360, as of this quarter?

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [81]

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Gaurav, this is Jagan here. The margin for Bluefin has improved this quarter. They have given by about 3.4 percentage. So they've declared a positive EBITDA for this quarter. Magnet, they've also had no drop-in profitability for this quarter, but that was more of an investment for the growth and they are expected to strongly -- both of them expected to strongly bounce back in the coming year.

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Operator [82]

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We have the next question from the line of Dipesh Mehta from SBI Capital Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [83]

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Two questions from my side. Can you help us understand, I think, last few quarters, we have seen good traction in top line? Do you think the momentum will continue? Or you believe now top line to -- likely to stabilize? And second question is about, is it possible to say organic revenue growth in Digital in FY '17?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [84]

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I don't have the organic revenue growth for businesses in FY '17 at the moment. Maybe we can find that order and share that with you subsequently. Coming to our largest customer, very, very positive on the outlook there. It's been one of our stellar performance for FY '17. And as we see, as of today, continuing to see good growth momentum in the accounts. We don't see anything as of today that gives us any cause for concern.

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Operator [85]

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We have the next question from the line of Sandeep Shah from CIMB Securities.

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Sandeep Shah, CIMB Research - VP [86]

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Sir, just wanted to understand about the 2 large deal wins which we had in Q3, how are we building up the momentum there? Because the large deal wins for Mindtree are sporadic. So do you believe that situation to change going forward? And if yes, why?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [87]

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Sandeep, by the definition, I don't think the world is in a great position right now that Mindtree can expect to get large deals every quarter. They effectively have long sales cycles. Competition, obviously, also is quite strong in some of those deals, et cetera. So they will be episodic. There will be a quarter where you will get something and there will be a quarter where we won't get anything of that size. However, the point is, deal wins continue to be very strong. I mean, $200 plus millions of deal wins in this quarter. It continues to be very strong.

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Sandeep Shah, CIMB Research - VP [88]

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Okay. Okay. Anything -- because now at a scale of $800 million, the importance of deal wins on a consistent basis for a larger size goes up. So anything structurally or strategically we are changing on that side?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [89]

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I'm just not sure if I see our business in the same lens that you are seeing. Our own perception is that, we need to continue to have momentum, which means good pipeline, good deal closures, et cetera. I don't think we're betting behind large deals every week or every month or every quarter. Because I don't think that is the way we are seeing the world in front of us.

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Sandeep Shah, CIMB Research - VP [90]

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Okay. And just last question. If we can bookkeeping is -- if we can get growth number in constant currency, excluding Bluefin, Magnet and Relational for this year?

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [91]

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Sandeep, this is Jagan here. We have -- the growth Mindtree on a stand-alone basis for the year is about 7.5 percentage year-on-year growth.

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Sandeep Shah, CIMB Research - VP [92]

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7.5?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [93]

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He is asking constant currency.

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Krishnakumar Natarajan, MindTree Limited - Co-Founder and Executive Chairman [94]

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On constant currency.

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [95]

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On constant currency, it is 7.5% year-on-year growth, but this includes RSI. This will not include Bluefin and Magnet.

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [96]

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RSI is relatively small, so I guess it probably doesn't matter.

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Unidentified Company Representative, [97]

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Mindtree alone.

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [98]

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Mindtree alone, this is a reported basis.

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Unidentified Company Representative, [99]

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Constant currency.

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Sandeep Shah, CIMB Research - VP [100]

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Okay. Okay. And this visa cost will come in the 1Q, right? As we used to have it...

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [101]

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Yes, you're right.

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Operator [102]

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We have the next question from the line of Madhu Babu from Prabhudas Lilladher.

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Madhu Babu, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [103]

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Sir, in your guidance, have you assumed any pipeline conversion, I mean, which can be a variable?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [104]

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As we have given the guidance, it obviously keeps multiple inputs in mind, so the pipeline that we have definitely is one of the factors that went into the guidance you gave for revenue forecasting we gave for the year of double-digit growth. We are highly confident of that number, but either deal win or existing customers having order cancellations will obviously change that number.

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Madhu Babu, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [105]

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Okay. And second, sir, steep addition in the sales headcount this quarter. Can we read anything into that?

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [106]

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No, Madhu, there is not a specific addition. It is little updation that has happened in this quarter. But we are continuing to focus on print and engagement of the customers and this investment will continue.

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Operator [107]

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We have the next question from the line of Nitin Padmanabhan from Investec.

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [108]

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When are the wage increases effective? Is it Q1 or is it Q2?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [109]

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Nitin, sorry, we couldn't hear you clearly. Could you repeat your question, please?

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Nitin Padmanabhan, Investec Bank plc, Research Division - Analyst [110]

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When are the wage increases effective? Is it Q1 or is it Q2?

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Rostow Ravanan, MindTree Limited - CEO, MD and Executive Director [111]

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1st of July.

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Operator [112]

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We have a follow-up question from the line of Sandeep Shah from CIMB Securities.

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Sandeep Shah, CIMB Research - VP [113]

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Sorry for coming again. Just on the line item, legal and professional charges have gone down materially. So do we expect that this could be a new normal going forward? Or you expect that it could be updation and may increase going forward?

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Jagannathan Chakravarthi Narasimhan, MindTree Limited - CFO, VP and Compliance Officer [114]

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Legal and professional charges, we are not expecting to go up again. This will be the new normal for that.

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Operator [115]

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Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Sushanth Pai for closing comments. Thank you. And over to you, sir.

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Sushanth Pai, MindTree Limited - Chief Risk Officer and Head of IR [116]

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Thank you, Aman. Thank you all for joining this call. We look forward to being in touch in the coming days. Good night.

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Operator [117]

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Thank you very much on behalf of 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.