‘Decision-making (by clients) is taking longer…’

Kris Gopalakrishnan, CEO of Infosys, has his eyes firmly fixed on margins, just the way Arjuna’s was on the bird’s eye in the Mahabharata. The current market for software and services may be difficult but Gopalakrishnan told Praveena Sharma of DNA Money that Infosys would continue to be selective in bagging new contracts and would not go for indiscriminate volume growth. Excerpts from an interview:

In the last one year, Infosys has been focusing on margins rather than volumes. You have cherry-picked deals, gone for bang for buck. Does this approach hold or will you go for volume growth in terms of client additions because a global slowdown looms?
No. We have always believed in profitable growth, and that’s the philosophy of the company. So, we will continue to selectively go after deals that make sense. And given what the environment is like, the focus is on growth.

But it’s not really a strategic shift, it’s a tactical shift. In the sense that the underlying principle remains the same — profitability growth.

So you won’t look at volume growth?
No, we are looking at growth with the same margins.

While you focus on margins, you may lose some opportunities…
Those are choices you make. Like when a particular deal doesn’t give you the margins you require, you need to take a decision. Those are conscious decisions.

Pricing power weakens as economies slow down…
Pricing is flat. That, in this environment, is OK.

Do non-US geographies offer the same margins?
Yes, any geography will offer the margins you want. All you need to worry about is making sure you provide the services that get you those margins.

At an analyst meet last week in New York, Infosys officials said demand visibility this year seems slower than in several years…
The growth rate has declined over last year because the macroeconomic environment is difficult. And our clients and industry analysts are also not sure when the turnaround would come.

So, based on that, we have a certain (demand) visibility. Our projections are based on that.. Typically, when we enter a quarter, we have 85% visibility. For the next four quarters, we have 60-65% visibility. Based on that, we said this year we will grow at 19-21%. This visibility is what drives our growth and projections. We have a certain process of modelling for giving guidance, and that’s driven by visibility. We need a certain visibility to give a certain guidance.

What do this quarter and the second half of this fiscal look like?
We have given our guidance. We can’t say anything more.

How are your clients in the US faring? Is discretionary IT spending slowing?
Budgets have been finalised. Customers are cautious and this is reflected in the decision timeline. The decision-making is taking longer, sometimes. The larger the project, the longer is the time for decision-making. That is the difference we see (this year).
Definitely, when you look at the budgets, they are either flat or slightly down. But the offshore work we do is driven not just by the budget but also by taking market share from the traditional way of doing things to the global delivery model.

That’s the primary driver for all IT services companies in India. That growth is still pretty good because globally the IT services industry is expected to be growing at, maybe 5%, whereas in India it is expected to grow at about 20%. That’s what the Nasscom has said.

Also, margins in India are significantly higher than globally. So, in that sense, the industry in India is in a better position … still growing at 20% and still having higher margins.

Are $100-million plus deals being bagged at the same frequency as before? Are clients increasing scope of work when they are awarding such deals?
The expectations from clients are going up in terms of productivity and value-added services. Having said that, it is easier for us to participate and win such deals ($100 million-plus) because (the traditional) model is changing to the global delivery model.
Also, since deals are being broken up into smaller pieces, it allows us to participate.

And, as the size of our company grows, we gain credibility and can participate in large deals. I would also say our own comfort and confidence in participating in such deals and winning some have gone up. There are multiple reasons why we were able to participate and win.

Is the shift from traditional to offshore becoming tough due to budget constraints?
No, we believe that the trend would continue for many years.

Do budget constraints come in the way?
See, from 35% last year we will be growing at around 20% this year. So the growth rate has come down but the secular trend of moving towards offshoring continues. It has slowed down, of course. And the Indian IT services industry is growing faster than the global industry.

Europe hasn’t slowed down yet but will most likely down the road. How do you offset that?
Europe is a very large market. There are opportunities to expand. We are doing this proactively. Most of our revenue at present comes from the UK, Germany and Switzerland, maybe Belgium, too. But we are spreading our footprint and that will help us.

The nature of work in Europe is different from the US in the sense that in Europe, we are seeing a lot more discretionary projects, development projects, transformational projects as well as larger outsourcing deals.

If you look at the two large outsourcing deals Infosys has signed —- Philips and ABN Amro —- they are from Europe. So there is opportunity for larger deals and transformational projects there.

What’s the emerging markets scenario?
India, the Middle East, Latin and South America, China … these are some of the new markets we are investing in. We are looking at providing integrated solutions to these markets.

When I say integrated solutions, I mean multiple services —- maybe IT + BPO, infrastructure management + BPO or consulting with application development. The value-add will be greater and hence, we will be able to get (higher) margins.

What does the deal pipeline in emerging markets look like?
In India, we started in November. I need to clarify, when we say India, it is for the new services —- India outside the Finacle (Infy’s core banking and financial services product) in which we have been in India for many years. Outside of Finacle, we have been there since November last. It’s looking good, we’ve won some deals and there are more in the pipeline.

And which are the verticals where you are seeing maximum traction?
We are focusing on financial services, manufacturing, retail, telecom and government. I think, what is different about India is our focus on public sector and government.

PSUs offer good margins?
Nods
There has been a gigantic transfer of petro-wealth to the Gulf in the last one year.

What’s Infosys’ strategy to leverage the opportunities this throws up?
We are definitely looking at the Middle East. There is a lot of investment happening there in terms of infrastructure, which should provide us with opportunities. We started investing (in the Gulf) only in the last six months. So it’s too early to talk on that market.
Also, we have not yet looked at Africa. Of course, Finacle is selling there, but for other services, we have not looked at the continent.

Has China been a disappointment?
As a market, we always knew China was going to be very tough because you have the brand issue … the Infosys brand is not well-known yet. You also have the issue of language. It is not a disappointment. We knew it was going to be difficult.

What is lower than expected is the use of China as a resource or development base. We thought that companies around the world would like to move work faster to China but it has not happened because of many reasons.
One, because they are quite satisfied with India. Two, they want to make sure that their concerns about security are taken care of…

Are there security risks in China?
It doesn’t matter whether there is risk or not, the perception is what matters. Third, there’s one more location they (clients) will have to justify supporting.

Have you stretched the break-even for your Chinese subsidiary?
Yes, it is still in investment mode.

When do you expect break-even?
We are trying to break even this year but we’ll have to wait and see.

What would be the buzzing verticals this year? Where are new opportunities?
If you look at the last quarter, manufacturing was one where we grew quite rapidly. Sequentially it grew by 30%. Then, we had growth in banking, capital market and retail. In telecom, if we exclude one client, the gain was pretty good. We have growth in all the large verticals.

Any new verticals standing out?
The smaller ones, where we have less revenue today, are of course opportunities —- healthcare, pharmaceuticals, transportation and logistics.

Which new services is Infosys entering?
We’ve added learning services. We’ve added software-as-a-service, where we are changing the business model. We are hosting it and the client will pay for use.

Despite headwinds, Infy maintains industry-leading margins. The secret?
Being selective. See, ultimately you have to make sure you take the call on which deals you want to do. You have to take the call on how to run your business. For example, if you look at the difference between our policy on hedging and our competition’s, we approach hedging for the short term. You have to be careful about the deal you go after, and the policy you have will decide (the margins).

For example, when we started our BPO services, we said we will go after transaction rather than voice. Within that, we felt we want to go for more value-added services…
p_sharma@dnaindia.net