Clients haven’t cut IT budgets: Infosys CFO

Padma Swaminathan, Priyadarshini Chatterjee, Yahoo! India Finance, On Thursday 13 October 2011, 3:56 PM

Infosys is going for a image makeover. In case you didn't notice it in the quarterly results announced yesterday, they are showing subtle signs of aggression. The global uncertainties notwithstanding, they've made a bold guidance backed by a confidence in their new strategies. Not only are they investing more in client-specific platforms and products, they are looking at acquisitions and expansion in the Asia Pacific region and Brazil. CFO V Balakrishnan put things a little more in perspective about how they are consolidating on their strengths and what they plan for in the future.

You surpassed the market pundits' expectations. How much has the reorganisation contributed to growth in this quarter?

We have been talking about it for sometime. The offshore IT industry has some major challenges a) The quality of intake is coming down especially with freshers. Earlier we used to train for 3 months but now we have to train them for six months. Even after training for six months we are seeing a dropout of nearly five percent. b) The scale: May be five years down the lane if we grow at the same pace then we may have to hire 100,000 people. Managing them would be a big challenge. Thus scaling up is going to be a big challenge. c) Part of the business is getting more and more commoditised. We don't want to become a commodity but want to be a value player. So if we put all these things together we thought what we need is to do things differently and thus maintain our superior quality growth. Infosys 3.0 was born out of this wherein one-third of the revenue comes from high end consulting, ERP, one-third comes from platform, IT, products, solution etc and balance one-third is the usual work we do. So I think we have made all the organisational changes, we have put the platforms in place. Now incrementally if we do things right I think we will look much better and better.

How much of the rupee fluctuation has helped in this process? Also, with the global slowdown, do you think you can sustain this momentum? If not, how much will it affect your business?

Our business is hedged on both sides. When the economy is doing well, they spend more money on IT which is good for us. When they are under stress, there is more focus on efficiency and cost. And, that is where we get a bigger traction of business. The challenge is if the economy goes down drastically like 2008, then clients might cut down completely. But currently we are well positioned in the market. Today we are in an environment where global economies are growing slowly. So there is a lot of focus on the client side to increase their business. Hence we are trying to become more relevant to the client and, for this, one needs a better mix of portfolios. In this kind of environment if we focus on building our consulting business (where we have seen phenomenal growth), we will be able to take a larget share in the market.

Your major revenues come in from BFSI space. Considering banks are under tremedous pressure in Europe, do you see your business getting affected?

For us 35 per cent of the revenue comes from BFSI. Currently, the banking sector is undergoing lot of changes. First, because of Basel III norms, capital adequacy ratio has gone up. But on the other side the regulators are also saying that you can't run a commercial, retail bank and an investment bank. It carries a lot of risks. So they want to separate proprietary trading from the retail and commercial banks. So your return on the business will come down drastically. In such a scenario the banks will try to reduce their costs and increase their mobility. So this is good for us. Secondly, the regulation environment is evolving. The regulators want to keep a tab on what the banks are doing, which means that they have to invest a lot more in IT. So in my opinion, going forward regulatory spending will increase, risk-related spending will increase, cost-efficiency spending will increase. And, we have a greater share of that market. So in turn having a large contribution from the BFSI space in this environment will help us.

Will pricing be affected because of the currency volatility? Will you change your guidance based on this?

We believe the pricing environment is stable. Our volume growth is coming as predicted. We are changing our full year guidance on this assumption. What has changed is only the currency.

With the year-end approaching are clients on budgetary allocations or cancellations of projects?

We are not seeing any clients cutting down the budget nor are they cancelling budgets. What we are seeing is some slowness in decision making and the long term projects are put on hold. We don't see any impact on IT spending but if there is a double dip kind of a scenario probably the client might shut down everything. As long as it is slower growth, client will continue their spending which is good for us. The possibility of a double dip has increased but I don't know if the world is ready for it. I am sure the governments will do what they can to avoid such a situation. In fact, in the US they are talking about a new job bill which is nothing but a stimulus for the economy. We can think the world will come to an end but the world never comes to an end.

What is your take on the new jobs bill? Will the IT/ITes sector be affected as there's already a huge debate on outsourcing?

Jobs bill is good for us. They are officially going to bring QE3 through the jobs bill which will help in supporting the smaller companies. Jobs bill might trigger some growth which is what everyone wants.

There has been a buzz for a long time about Infosys acquiring companies in the US. But is the company focusing on any particular vertical?

Acquisition is a means to an end. It is not an end in itself. We are looking for acquisition and the comfort is we are sitting on $3.8bn of cash. Our intention is very high but we need to find the right target. But our focus is more and more on high end consulting kind of companies, product services because we believe that is where we have to grow. It needs to be highly strategic wherein we are able to multiply our revenue growth. For us, size doesn't matter.

Ashok pointed out that Infosys was mulling to expand its operations in the healthcare sector in the US. What is your plan going forward? Are you also going to focus on life sciences?
Life sciences is one of the areas where we are looking for acquisitions. There is a lot of spending done by the pharma companies in the analytics side. US government brought in the new healthcare bill which focuses on a lot more IT spending. So in US, we will get a lot of traction from the healthcare and the insurance sector. We are using a Mc Camish product in our BPO to bring in a large $100mn dollar deal.

Coming to the telecom sector, where do you position yourself?

Globally telecom is a very challenged sector. Everybody is increasing their capex on wireless. So in the next two years, the operating expenditure might go up. As far as India is concerned, with so many scams, no government intervention is going to happen for some time. We won't see any policy changes and that in turn is going to hurt the industry. There is a paralysis in the government. That is a reality. So delayed decision making process will have a larger impact on the industry and the overall economy will suffer because of that. Secondly, we are also seeing a slowdown in India due to the global scenario. Thirdly, we are not seeing any drastic reforms in the country.

India still remains a small market for you? Going forward do you plan to increase your presence here? Are you planning to tap the opportunities in the domestic market?

We have a unit which is focusing on India. In fact, we are doing a project with Income Tax department where we process all the I-T returns. Last year we processed around 85 lakh returns, this year quite possibly we might process more than 1.5 crore. We also won an e-TDS contract from the I-T department and we are participating in a lot of deals involving companies like Indiapost. We are seeing a good pipeline in India and if that continues we might build a solid India business centre.

As you said we are seeing a slowdown. So how do you think we can protect ourselves from this global slowdown and do you think RBI's policies is actually helping us?

See today the problem is more from the supply side. Government's rural spending is creating a huge demand. So at this point, the government should focus on bringing agricultural reforms, ensure the distribution system is improved and adopt new technologies which would enable the yield to go up. Currently China's yield is double that of India. So government needs to do a lot of policy intervention which they are not doing. So in the short term how do you manage inflation? The answer is rate hike. But let me tell you that is not going to solve the problem. The interest rates have gone up drastically but that has hardly impacted the inflation. So unless we do structural reforms I don't see the nation going forward.