V.G. Siddhartha seldom airs his views about businesses he is involved in. But in a candid conversation with BT, the Cafe Coffee Day founder discusses the rationale of his investments in the Bangalore-based mid-tier IT company MindTree , in which he is also the largest shareholder. Edited excerpts:
What made you increase your stake in MindTree? For 13 years, the
Coffee Day group companies and I together had a stake of 6.5 per cent in MindTree. In 13 years, we have earned a compound annual return of 25 per cent-plus on our investment. In the last eight months, we have raised our stake to around 22 per cent, buying from the market at prices ranging between Rs 450 and Rs 475 per share. I believe our new investments, too, will give us a return of 25 per cent over the next ten years. These returns, we must remember, are tax free. There is no tax on long-term capital gains.
What makes you confident about earning such returns?Earning a 25 per cent return on small investments is not a big deal. But when your stakes are significant, getting returns of 25 per cent is not easy. Even the best investors are known to get between 20 and 22 per cent returns on their investment. But MindTree has given me 25 per cent-plus returns because the company is led by a team of extraordinary professionals. How can I not have confidence in it?
Any plans to hike your stake further?
Yes. I will go up to 24.5 per cent, but I can't say when I am going to do that. These investments will also help me to spread my investments across sectors - from plantation to coffee retailing to logistics - and minimise risks on returns.
When do you expect MindTree to report billion-dollar revenues?
I have no doubt MindTree will touch $1 billion in revenues in the next four to five years and $2 billion in eight to ten years, with an EBITDA margin of about 18 per cent. On a run rate of $2 billion, MindTree will have a cash margin of $360 million to $400 million. When that kind of revenue starts kicking in, the company's valuation will soar. If MindTree revenues reach $2 billion, its valuations will be worth $3 billion plus. Today, on a valuation of $550 million, my investments are worth about $125 million. Ten years later, they could be worth $700 million.
The Indian outsourcing industry will grow from $60 billion now to $200 billion by 2020, according to Nasscom estimates. I am sure MindTree will account for one per cent of India's outsourcing industry in eight years. I have taken a long-term call on this investment.
As the largest investor, what are your broad plans for the company?
Our vision is to make MindTree four to five times what it is today in eight to ten years. We will support the management and work towards achieving that.
What makes you so bullish about IT and MindTree?
Let me share an anecdote. Nandan (Nilekani) and I have known each other since 1992. We both were in Hyderabad sometime towards the end of 1994, and were staying in the same hotel. At the time, Infosys had revenues of about $60 million. While having dinner, I asked him when he planned to retire as he had achieved so much in his life and career. He said he wanted to put all his efforts into turning Infosys into a billion-dollar company in 10 years. Nandan was saying these things with a sense of conviction. I laughed within myself, but showed no expression outside. In 2004, Infosys became a billion-dollar company, and two days after the results were announced, Nandan called me to remind me about our conversation 10 years ago. I recalled - Nandan was so convinced about what he was doing and reached the goal he had aimed. Ever since, I stopped addressing Nandan by his name. I call him Guru.
Coming back to MindTree, I have known Subroto, K.K. (Krishnakumar Natarajan), Rostow, Partha and Anjan (the top management) for 13 years. Their competence and commitment to the company are beyond words. I treat Subroto like my older brother and the rest as my friends. Under their management MindTree will grow at a compounded rate of 18 to 20 per cent for a long time to come. The team goes about its work in a methodical way.
But MindTree did make a few errors…
Yes, in the last five years we made a few mistakes, such as in forex hedging and going in for handset designing. But we have learnt lessons. At the board level, we have discussed them and decided not to repeat such mistakes. I can say with some conviction that the next five to seven years are going to be the greatest for MindTree. You can already see the signs of good performance. We expect to end this year with revenues of $450 million and cash or cash equivalent of $200 million plus.
Do you have any exit plans?
No. I am committed to staying invested for five to eight years. The present team is doing a good job, and we will support this management. My investments are safe in its hands.
How real are takeover threats?
There is absolutely no such threat. Promoters, the friends of promoters - including me - and some stock option holders together control 51 per cent or more of MindTree. In such a situation, there is no way anybody can take over management control.
What is your relationship with the company?
I am a director and they have put me in the Audit & Strategic Initiatives committee. At the board level, we really work hard. Whatever inputs I provide during board meetings, I provide as a director of the company, not as an investor. To be frank, I hate to call myself a director. I am a friend of MindTree. My relationship with the MindTree team has grown stronger than before.
Where does the company stand on preparing a leadership team for tomorrow?
MindTree has a full-fledged plan on how it should be run for the next five to seven years. Everyone in the board is very happy with the succession plan. You may recall that the transition from Ashok Soota to Subroto Bagchi was a smooth affair.
How did your journey into technology investments begin?
My first technology investment was in 1993, when Infosys made an initial public offer. I had no clue about technology back then. I went with my friends Vallabh Bhansali and Nimesh Shah. We just paid the application money of Rs 35 per share. (The IPO price was Rs 95 per share. In June 1993, the Infosys stock opened at Rs 145 per share.) I sold the stock for 10 times my investment in six months of listing. I called Nandan and asked him to tell me about a good technology investment I could make. I also told him I loved the Infosys stock but ego prevented me from buying it again (laughs). Later I made small investments in small technology firms and made small returns. Now, MindTree and Ittiam Systems are my only big investments in tech firms. I, of course, have some investments in a few small tech firms as well.
Do you have any plans to get into venture funding?
No. In the 1990s, I had the time and energy to monitor small investments. Now, I can't. I don't make $5-$10 million investments because I can't monitor them.
Has anyone approached you to buy up your stake in MindTree?
No. People know I would not sell.
V.G. Siddhartha owns a 22 per cent stake in MindTree through his companies and personal holdings. 
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