Believe in margins more than topline, says Narayana Murthy

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Believe in margins more than topline, says Narayana Murthy

In an exclusive interview with CNBC-TV18, Infosys' mentor Narayana Murthy says it is difficult to perform when the focus is on margins.

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Excerpts from India Business Hour on CNBC-TV18 Watch the full show » ALSO READ See latest News about Infosys See previous management interviews See what other Experts & Brokerages are saying about Infosys

Infosys , which declared its better-than-expected third quarter numbers but shocked market with its fourth quarter guidance , has not disappointed its mentor Narayana Murthy. 

In an exclusive interview with CNBC-TV18, Murthy said it is difficult to perform when the focus is on margins. "I have always believed in margins more than toplines," he said.

Analysing the Information technology sector, Murthy said the situation has become tougher than before. The economy is not improving at a pace expected which is why the companies are getting wary of the environment.

The US and European disturbances are acting as a double whammy, affecting operations of many European and American companies. The euro crisis has been more severe than expected; Murthy said adding that India's worries are compounded by soft economic growth in China.

Below is an edited transcript of his interview with Shereen Bhan. Also watch the accompanying video.

A: Definitely there is no doubt at all that the IT industry is operating in a much tougher environment than before. When you combine the difficult days in the US with the difficult days in Europe, it's a double whammy. These are two major economies to which we have been traditionally exporting significantly, and the fact that the economy has not been improving as fast as people would have liked has made the corporate leaders even more wary of spending on capex. So therefore it is a tougher market, there is no doubt at all.

Q: Infosys' results yesterday did not excite the Street; the stock was down significantly. But are you on your part disappointed with the kind of performance that has been delivered?

A: Not really because when you strive for industry defining margins, when you strive for 20-30% higher in pricing compared to your competitors, in these difficult situations it's quite understandable that your growth will be affected. But this is a decision that the executive management has taken after lots of discussions amongst themselves.

Ofcourse I am not part of this since I have not signed non-disclosure agreement after my retirement, I am not privy to what goes on in the company, but I know one thing that these people have decided to continue to focus on high per capita revenue productivity, high margins and therefore it's that much more difficult compared to anybody else. So, it's understandable and I am not disappointed.

Q: So given the tough operating environment, the global as well the domestic situation, as a mentor what would you advice the management to do at this point?

A: One thing I am certain is that they have kept up the value system, they have striven for respect of the corporation which was primary objective that we decided upon in 1981. I think I have always believed in margins much more than topline; I have believed in bottomline much more than topline and that is something that I decided right in 1981 and I am very happy that Shibu, Kris and Bala have believed in bottomline. Therefore we will continue to have the highest margin in the industry and we will always put margins ahead of the topline.

I am quite happy with what they are doing because at the end of the day margins on one side and value system on the other side are the two extraordinarily important objectives for us and they have continued that.

Q: Would you say that the last decade has been a lost decade when it comes to the reform agenda, that the big bang second generation reforms that India has been waiting for?

A: When we all saw the impact of the economic reforms of 1991 in terms of improving the growth rate of the economy, in terms of creating jobs, in terms of our exports, in terms of attracting foreign direct investment, in terms of our current account deficit, in terms of our foreign exchange reserves, then that should have given enough confidence to our political leaders to say that we will press on the reforms. I firstly think that waiting for 20 years was not a very smart thing.

Q: The speculation and the buzz in the capital has begun about who is going to succeed Pratibha Patil. The last time we spoke to you, you said that if an offer was really made, which was an all party offer, you would be okay with accepting that. Are you still open to the role of India's President?

A: No, I think that is hypothetical. I don't think you and I should spend any time on that. I was put in a position where I had to say what I said, but that is purely hypothetical. What is important today is that the political parties on all sides of all hues, from both sides of the isle have to come together, they have to put the interest of the nation first and therefore the Opposition will have to support the government as long as government is doing something good for the country. I would say that if that happens I will be very happy, rest of it is really not very important.