Bangalore: Software company Infosys Technologies Ltd has reported a 1.14% rise in profits for the three months ended 31 March to Rs1,600 crore from Rs1,582 crore in the preceding three months. Revenues increased 3.54% to Rs5,944 crore, against Rs5,741 crore in the previous quarter. The company’s top management team—chief executive officer and managing director S. Gopalakrishnan, chief operating officer S.D. Shibulal and chief financial officer V. Balakrishnan—spoke in an interview about the results and the road ahead for the company. Edited excerpts:
Taking on competition: (from left) V. Balakrishnan, S. Gopalakrishnan and S.D. Shibulal at the announcement of Infosys’ quarterly results. Hemant Mishra / Mint
After a robust 16-18% dollar revenue growth forecast for 2010-11, your expectations for profit after tax (PAT) and earnings per share (EPS) is still 4.3% to 8.6%. Why is there such a significant gap between your revenue and PAT guidance?
Gopalakrishnan: Clearly, the rupee has appreciated significantly from last year to this year. It is approximately 6%..., plus we have factored in a compensation increase. We will see how we can play this through the year, but given that the rupee has appreciated significantly, I think it is a reasonable EPS guidance. We are only looking at a drop of about 150 basis points (one basis point is a hundredth of a percentage point).
How do you explain the drop in margins for the next year? Are there mitigating factors that you can use to hold margins against this slip?
Balakrishnan: There is always a mitigating factor. If you look at the guidance, we had taken Rs44.50 to a dollar for the currency. That means 6% appreciation in the rupee as compared to average rate for the full year of FY10 that will have an impact of around 3% on the margins. We have the wage hikes. We are increasing wages of senior people by around 10%, middle to lower by around 13-17%. On an average, offshore wages could be about 14%; outside India we are increasing by 2-3%.
We are doing this for two reasons—we can afford it and in the growth environment, we need to retain the best talent and that’s what we have done. We have seen some competitors acting irrationally in the market place. So they have to get the message that the cost base could go up. It will help us in the market. Hence, we have given wage increase that will have impact on the margin of course. So net-net impact on the margin for the full year is only 150 basis points.
If the growth comes beyond what we expect, then probably that will give us some buffer on the margin but right now with all the factors what we have seen today—150 basis points decline in an environment of 6% appreciation (of the rupee) is extremely good.
Can you explain how you see the dollar revenue guidance panning out over the next four quarters? Is it going to be an incrementally increasing growth curve? How are you mapping your quarter-on-quarter performance on revenue?
Shibulal: I think first of all one should look at the whole picture. We have talked to most of our clients. The global economic environment continues to be challenging. But at the same time, most of our clients have closed their budgets; they are starting to take decisions. But those decisions continue to be short-term; they are not willing to take very long-term decisions. That is what is reflected in our guidance.
If you look at our Q1 (April-June) growth, we have given 3.1-3.2% growth (prediction), and at the same time, we have guided for 16-18% for the entire year, which means that the growth is going to be gradual. We have also had great wins last quarter. We had five large wins last quarter—two of them are above $100 million—and four large transformations in the last quarter. One is above $50 million, which means that we are winning large outsourcing deals as well as large transformational deals. But there will be ramp up times, so the growth is going to be gradual through the year.
Do you think the 16-18% revenue growth you are projecting will be evenly spread through 2010-11?
Gopalakrishnan: We would typically assume that in the Q4 of any fiscal, which is the budget quarter, the uncertainty is very high. So we will be conservative on any assumptions on Q4, but otherwise it is evenly spread for the remaining quarters.
Is it evenly spread out for Q2 and Q3?
Gopalakrishnan: By and large.
Is the 16-18% revenue guidance purely in terms of volume growth?
Shibulal: I think it is purely volume growth. We have not assumed the revenue productivity going up next year.
No decline in pricing?
Shibulal: The pricing continues to be stable. Most of the pricing renegotiations are behind us. We are still seeing some sporadic pricing renegotiations and we could also see a tail wind from the previous renegotiations we did.
Have you said earlier that in you have seen a slight slippage in pricing this time in the fourth quarter?
Balakrishnan: Yes, in Q4 the pricing declined by around 1.5% on a blended basis; it’s 2.5% offshore and around 0.7% on-site and constant currency. The decline has been only 70 basis points because the currency moved against us.
What are the additional levers to keep margin erosion in check? Is it utilization level or something else?
Balakrishnan: Utilization is one of the levers; we are adding 30,000 employees so the pyramid effect will come into place when over the year; probably the impact could get minimised. We have other levers like on-site, offshore mix, the mix of businesses. If you look at this quarter, consulting and package implementation has grown so that is a high-productivity, high-margin business. So we have several levers on the cost side, but we will not use all of them at the same time. Once in a while we will use some of them to mitigate the impacts on the margins.
Can you elaborate on irrational pricing because attrition has gone up? Do you think wage hikes at 14% offshore average will be enough, or could there be an upward pressure even from those levels?
Gopalakrishnan: Attrition is a function of not just compensation; the compensation is only one of the factors. It is about the culture, the working environment, challenging assignments, opportunities for growth, learning opportunities. It’s a combination of several things and we believe that we have the best package for our employees. Given that the company has done well, it is fully reasonable that a part of that is shared with the employees. Variable compensation this quarter again is 100%, and we have given a compensation hike, which is very similar to what we would do in a normal year. In a growth year that is what we had given. Part of the reason is of course attrition, part of it is to be competitive in the markets.