‘Slowdown will affect onsite companies more’

‘Slowdown will affect onsite companies more’

Bangalore: Infosys Technologies Ltd, India’s second largest software exporter, is upbeat about its prospects, despite industrywide concerns over a slowdown in the US economy. The stock market doesn’t seem to share its enthusiasm with Infosys, whose share price has dropped by around 30% since 19 February.

V. Balakrishnan, chief financial officer of Infosys spoke to Mint extensively on the road ahead. Edited excerpts: How do you see the subprime crisis impacting Infosys?

A lot of banks (in the US) have already taken a huge hit and nobody knows the total impact. However, impact for offshore players could be limited. Even if customers cut their budgets, they will have to offshore more to increase the return on their IT investments.

Offshore’s share in their total IT spending could increase. Till date, we have not seen any concerns emerging from any of our customers. In 2001, the profits of US companies were around 8% of that country’s GDP. Today they are 20% of US GDP. Most US companies have operations outside India and have presence Europe. Most of the revenues are coming from Europe and Asia. There have better balance sheets and P&Ls. Companies are well prepared now to take some of the impact. The impact on offshore players would be lesser than that on the global players.

But players like IBM and Accenture are also ramping up their offshore presence…

They have a reasonable presence in India. One has to see whether they have an integrated model and are not proactively selling offshore as a service to their client. Wherever customers push them for offshore they give it as a service.

If they (want to) proactively sell the service, then they will have to cannibalize their revenues. For them, India is still a cost centre and there are still a lot of challenges. We are all growing at 30% and they are growing at 10-12%. We are taking market share.

How is Infosys bracing itself for a potential slowdown?

We have better relationship with clients and are part of their budgeting lifecycle. We have a wide range of customers and know what kind of business we can get from them. Our revenues are not concentrated with large customers. The depth of customers is high and to that extent the impact could be minimal.

Any out-of-the box measures to counter the slowdown this time?

The whole idea of pushing more into high value-added services such as consulting, package implementation or solutions is to increase revenue productivity and build better front-end, which could minimize the impact.

Given volatility in the currency, has Infosys seen a shift in its non-rupee based cost structure as you increase headcount overseas?

We are a net foreign exchange earner to the extent of 51% (of reveunes). We earn about 50% revenues onsite. About 30% of revenues go towards onsite salaries. As for the balance, most of it is rupee expense as most of the employees are here. Impact on operating profit margin for a 1% change in the rupee-dollar rate is 50 basis points.

You have to leverage India, (where we have 70% of our employees) otherwise the model will not be competitive. At the end of the day, you have to leverage the global delivery model.

Infosys has been talking of non-linear growth for some time now. Comments?

Today, pure consulting accounts for 5% of our revenues. Package implementation accounts for 18%. We have a good presence in the solutions space, which we have to monetize. We are focused on improving revenue contribution from all these three. In the short term we have levers such as (employee) utilization and scale benefits.

Your client wins have been lower than compared to those your peer group, especially in Europe. Comments?

Some people talk a lot, we don’t. In Europe we have won a lot of multi-year deals in range of $30-50 million. We don’t announce all deals. Growth in UK and continental Europe is much stronger than in the US. We are seeing some change in Germany, which could become an interesting market. France may take some time. We are looking at these countries for acquisitions.

Does that lend credence to the fact that you are looking at the Capgemini deal?

We have denied it. Our acquisition strategy is to look at small, niche companies that are easy to integrate. We are looking at companies in range of $100-200 million in revenues. Acquisition should help us enter new geographies or verticals in areas such as healthcare, testing and BPO. Large acquisition always have a large amount of risk. Today we are big and can look at large acquisitions, but they should be reasonable (priced) and they should work.

Is Infy compromising its growth to protect margins?

We aspire to have the best margins in the industry.In business, bottom line is important. We want to be a value player in the market. We are not growing slowly. We are going at 35%. There’s nothing wrong in being conservative.