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US slowdown not to impact Infosys: Nandan Nilekani
October 12, 2006
Managing Director and CEO of Infosys Nandan Nilekani does not anticipate any impact of the US slowdown on Infosys. Nilekani says that Q2 saw a 1.2 per cent increase in blended prices. Margin expansion is also on account of rupee depreciation, he said.
Excerpts from CNBC-TV18's exclusive interview with Nandan Nilekani:
There were apprehensions that because of all the talk of US slowdown you may choose to be a little bit more circumspect this time but your guidance is even stronger?
Yes, I think we had a good quarter; we grew sequentially in dollar terms at 13 per cent, rupee terms at 14.5 per cent. We also had a 2.5 per cent improvement in our operating margin through visas, SG&A and rupee depreciation.
Right now the business is good, we did check but all our customers are making commitments, so we are able to revise our annual guidance to over $3 billion, which comes to about 40-41 per cent annual growth rate in dollar terms.
Are you assuming any uptick in pricing at all?
This quarter there has been a 1.2 per cent uptick in blended revenue productivity, but basically we are not assuming anything much different, in the sense that it's slightly upward but nothing more than that.
There is no worry at all because your guidance is now at Rs 66 for the full year, is there no worry that you are picking up from your clients at this stage about a possible slowdown and its impact?
We did do a dipstick because we had heard about the fact that there was this concern about the global slowdown but our conversation with clients have not indicated anything as such. We believe that our clients continue to think that they will invest in us as they have done before and therefore we have been able to give more than 40 per cent guidance.
I believe that your $70 million clients have gone up from 3-6 between last quarter and this quarter, have you seen some serious ramp up happening?
The good thing is that if you look at our top ten clients and if you look at our top twenty-five clients, I think you will see good growth and that has contributed to what is happening here. Also I think now we have a broader constellation of top clients, in the sense that we have many more clients in different industries, in different parts of the world who are growing with us, they could be in financial services, telecom or whatever. So I think that is contributing to the growth.
Do you see yourself tightening your belt on SG&A some more because in this quarter you have done some of that?
We have already got a 0.5 per cent improvement in the operating margin this quarter on the SG&A, but I think I won't say it is tightening, we are seeing it as economy of scale, what we have to spend on marketing, what we have to spend on sells. We will do that but just the growth of the company and the size allows us to get that economy of scale.
This time around it has been ticks on almost every count, your top and bottomline growth, your operating margins as well. As you look into the next few quarters, what of these do you see as a biggest challenge, maintaining the volume growth, getting the sort of bottomline growth or maintaining your margins itself?
I think on the volume growth we are comfortable with our revised guidance of over $3 billion. On the operating margins this quarter, we have seen a significant improvement of 2.5 per cent but on an annual basis, it will be comparable to last year.
On the net margins side, we have seen improvement this quarter. Again if you look at the improvement this quarter, we have given a guidance of 33 cents; we have done 36 cents of which one cent has come from rupee depreciation, and two from the growth. I don't see any specific concern; we hope to be able to deliver on all the various dimensions.
Tell us a little about your sponsored ADS and when you plan to offer that?
I am limited by what I can speak about this sponsored ADS, it has been approved by the board, it is upto 30 million shares. We have articulated a long-term goal, being in one of the global indices, so this is a part of that journey. Beyond that we cannot really talk about ADS due to SEZ laws and other constraints.
Tell us a little bit more about this dip stick that you spoke about, what are they saying, for the moment, no worries?
Nobody can give a definitive commitment for the next umpteen years. But I think what they are saying at this point in time is that they do see an increase in spending, particularly that part of spending, which goes towards offshore. That is an important part and we have been saying this for several years now.
It is not the quantum of IT spending going up, which is not going up that much after the bubble, but it is actually the fact that it is being re-allocated in a way that there is more productivity for that money. And this is how we benefit and therefore we take market share away from the legacy players. So I think in that context, they are saying that they will continue the spending the way they have been doing and that has reflected and articulated our guidance.
Just as a snapshot, how have the subsidiaries performed and are you seeing margin improvement across your subsidiaries as well in this quarter?
Overall the subsidiaries have contributed totally about $5 million to our bottomline, so the bottomline of Infosys is $193 million, consolidated to $198 million.
But among these, clearly Progeon and Australia have been profitable; China and consulting continue to be in investment mode. But I think the fundamental drivers of strategy are all in place. In consulting, we are seeing a lot of new customers being added, we are seeing a lot of assignments, which are transformational in nature, in China we are seeing some improvement in the local business. So I think whatever we have planned is on target.
Would you say or would it be unfair to say that you are probably going a little bit easy on the spending curve now because last three or four quarters, you have been aggressively spending both on SG&A and on infrastructure, is that likely to ease off a bit in the next three or four quarters?
No, I think as I said we are not going to compromise on what we have to spend, either on infrastructure or on SG&A, because that is the life-blood of the business. One of the big reasons why we had improvement in operating margins was actually due to reduction in Visa costs, 1.1 per cent was the contribution of the Visa cost reduction to margins. So I think we are not going to compromise on what we need to do.
For example, on training, we are spending $140 million this year, so I think where we have to invest in the business, whether it is on people or whether it is on the market side, we will not compromise.
How are you feeling about business, generally from where you started off this financial year with and where you are at this point? Do you think things might be a little more tamed because of those overall concerns in the US or there is no reason to worry?
We have revised our guidance on both occasions. We began the year with a certain perception of what the growth will be and both times, we have been able to revise it upwards.
In this environment, we can't get 40-41 per cent growth in dollar terms, go from $2.15 billion to over $3 billion. For one, it sort of confirms that the market is still robust for our value proposition and I think it's important to understand that it's not an overall market scenario. It's not that every IT company will have this benefit, this benefit comes because we offer a superior compelling value proposition.
The second point is that at Infosys in the last several years the huge investments that we have done in training, in infrastructure, in creating a performance work ethic for our employees and investing in solution building, domain capability building, they are all mundane things. But are really making this company achieve this kind of growth.
Three or four years back you had a period of slowdown in the industry, at this point can you see something like that looming ahead, not two quarters ahead because you have been through one such downcycle, three-four years back?
I think in business, there are always cycles and there are always times of ups and downs. It's partly to do with external environment, we are obliged to manage the scale and there are many reasons for that. So I really cannot comment too much into the future on those things. I think at this point, we have good business environment and we hope to do 40 per cent growth for the year.
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