Coming on the back of challenging Fy24, where Mphasis saw its net revenue decline by 6.6% (constant currency) Year-On-Year (YoY), however the first half of FY25 has the company chart on a gradual recovery path with -0.2% and 2.7% sequential growth in the Q1 and Q2 of FY25, respectively. As the company looks to sharpen its focus in AI adoption through industry collaborations and its Mphasis AI division, Fortune India spoke with Nitin Rakesh, CEO and MD of Mphasis, on what lies ahead for the company. (Edited Excerpts)

Fortune India: Since forming a separate division - Mphasis AI in June 2023 to focus on your AI and GenAI offerings, can you share insights into its functioning?

Nitin Rakesh: It is a division with a shadow P&L, and why we have a P&L is because, in a way, I'm telling my team that 100% of your business should be actually in that unit. It's a division to further AI to every customer and every solution we provide. So the integration is happening at a solution level, and the capabilities are being built whether it's AI ops or modernisation. It is a self contained unit, at heart of which are the architects and the other designers who are designing the solutions. The product salespeople are sitting in the AI unit because I can't expect the field to have the expertise to sell AI based solutions overnight. In three years, everybody's going to be an expert at selling AI-based solutions, and for those three years, we've seeded this Mphasis AI unit with a set of experts who are building and selling these solutions and are motivated and incentivised only with AI TCV.

Fortune India: In the last earning call you said 35% the pipeline being AI led, can you share insights on impact it has on margins for the company?

Nitin Rakesh: To be honest, we are focusing mostly on capability and not on margins, ensuring that the right value proposition is visible to customers. For instance, in IT operations, the business cases are 30% reduction in cost, 50% reduction in tickets, is that all you get? No, you actually get a 70- 80% lift in availability, which is a huge NPS lift boost. If systems don't go down, customer satisfaction goes up, regulators get happier, so it's not just taking cost out. That said, cost is a huge pressure for every enterprise and never goes out of fashion. However, customers today are saying, “if I can get more than just cost takeout, I'm very happy.” So that's why we call this the savings-led transformation mindset right now. While I give cost savings, I'm giving you a better operation, I'm giving you an operation that is not prone to manual errors or manual controls anymore and that's what is the focus right now. Margins in our industry is not all that a big concern, especially if I am able to take some of this nonlinearity and pull back into the margins.

Fortune India: You still have over 50% of your revenues coming from the top10 clients, so what is your current approach to such high client concentration risk?

Nitin Rakesh: It's always a work in progress. If I look back five years, the biggest problem was that 28% of my revenue was DXC and that was not even on the concentration list. So, I think there is no perfect portfolio of business and to me bigger accounts are safer than smaller ones. In banking, I'm very happy we have large customers, and the only way I can get around this problem is by growing the next set of customers faster than these customers, without diluting our right to win. To me, the concentration risk of industry, geography and customers- there's no perfect solution to that. The only way to do it is to constantly expand your portfolio of offerings, your portfolio of verticals and your portfolio of customers.

Fortune India: Since around 16% of your revenues come from the Business Process Services business, what segments have AI/Gen AI tools impacted and are margins a concern?

Nitin Rakesh: There are parts of BPO that are already highly susceptible—for example, contact centers, where every enterprise wants to reduce the number of calls coming in, because customer support has to be better than just answering the phone. So conversational AI, agentic AI, and agent assist all of these efforts are to reduce the number of agents and the number of calls and increase the digital automation to 95-97%. IVR did that a lot, now you're doing it with AI agents. Then if you look at other large pockets like onboarding, risk and compliance, mortgage, claims and admin are still in early days, but over the next 2-3 years, we will see a lot of LLM-based offerings available to create efficiencies of up to 50%. If that leads to volume expansion then the impact will be more muted. If not, then the business will face headwinds. Our base case is, if we don't apply agentic AI to anything that we do on the BPO side, that business will be gone. Claims, admin, underwriting, processing, risk, sanction, screening, KYC all of these have to be AI enabled and that's the base case with which you're approaching this business. With AI, margins in BPS is not an issue, the issue is revenue itself.

Fortune India: While the last 2 quarters have some recovery for you, what is the growth trajectory in the short term and when do you expect the investments made into AI capabilities showing results?

Nitin Rakesh: The investments are already showing up in the pipeline, which is a lead indicator but the question is, if there is enough conviction and comfort for customers to start committing to these larger programs. Some improvements have happened, which is what is showing up by the numbers from the last two quarters. It's not systemic yet, It's not at scale yet. Cost is still a big issue. The US elections are out of the way, so I think that you will see an unleash of spending compared to what it was in the last two years, but it will still be in pockets.

One area that you will see continued investment will be risk and compliance, where there is a lot of catch up to do. Geopolitical risks aside, BFSI seems to be the better bet and is going to continue to drive growth. I called out in December of last year that banking has bottomed, and our revenue decline has bottomed. Since then, we've actually shown three quarters of growth. Banking in the US is a good place to be, which wasn't the case in 23. The issue with banks was if there is a recession and they'll have to start making credit losses and that I think we have avoided, which means banks are actually sitting on a lot of reserve which they will have to invest.