With macros remaining unchanged since Nasscom’s February forecast, president Som Mittal sees very little reason to change it at the current juncture. The industry body has forecasts the sector to clock 12-14 percent growth in 2013-14, faster than the revised 10.9 percent growth it predicted for the year, as economic recovery in the US and Europe may prompt more companies to farm out work to India to save costs.
"We are quite sure that unless something worsens over the next one-two quarters, at this point of time the 12-14 percent should be achievable in dollar terms," he states.
Commenting on the US’s proposed Immigration Bill, Mittal says, if the draft Bill goes the through the way it is prescribed, without any changes, may have a serious impact on Indian IT companies. “We will have to find alternatives if the Bill is passed,” he told CNBC-TV18.
He says the Bill can turn into a law earliest in six to eight months.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Will National Association of Software and Services Companies (Nasscom) need to relook the kind of guidance it set out for FY14 because you have one company that is pointing to potential de-growth in Q1? There is one that is talking about 6-10 percent, two that are talking about beating Nasscom. Is Nasscom left a bit confused about the trends for this year?
A: We had given out a guidance just in mid February so it is not being too long and I don't think fundamentally too many things have changed in these last two months, no macro economic factors have changed. While the uncertainty remains, I think the fundamentals of what we have to offer also remains very strong.
We are clearly seeing that it is no longer just the IT budget but people are dipping into the marketing budgets, analytics, social media, and mobility all these are drivers as well. There have been differentiated performances across but the way the new verticals have been added and also new geographies, we will have to wait and watch and I don't think at this point of time we would be reviewing our forecast.
Q: Differentiation is one thing; we are talking almost about polar opposites here; Wipro is pointing to the fact that there could be de-growth in Q1, and there is Tata Consultancy Services (TCS) saying we are confident we will beat that 12-14 percent that Nasscom has set out. Have you ever seen so much bipolarity in the industry and what are you putting it down to?
A: This is something that has happened in the last few years. During this period since 2008; companies have been reviewing their business models.
If you look at the period before that almost everybody had the same vector of growth. By and large there would be some difference in the growth rate but the vector would be the same. I suppose every company is at different points of time in terms of how they went and restructured themselves, changed their strategy etc. I am sure both the above mentioned companies will get back into action and you should see growth. Even in case of some of them, if you take the extreme end of their guidance, at the higher side that is pretty positive from where they were.
Q: The other issue that cropped up last week was the draft guidelines of the Immigration bill. In your mind how potentially damaging could this be for the IT companies and in terms of a timeline how long do you think before which this could become a law?
A: I will start with the second part of your question. The Immigration Bill would have got introduced on Friday; we still have to get that conformation. This has to be debated within the senate, has to come through the judiciary committee and so on. Today, there is a senate hearing on Immigration. It is a long drawn process and then it is going to go through the House of Representatives where the drafting hasn’t even begun. Our estimate would be that the act, the earliest it could come 6-8 months from now but it could take much longer.
By the way it is comprehensive immigration. The issues that impact us are only one part of the bill. There are going to be much higher debate within America on issues relating to undocumented workers and family, temporary workers and many other areas that are getting addressed in the comprehensive immigration bill.
The second part, if the bill goes through without any changes the way it is prescribed will have a severe impact on our business model and it will take us time to find out alternatives to work. There are conditions which prevent today making our people work at customer’s sites. There is talk about increase in wages; there is discriminatory visa fee hike only applicable to companies that choose our model.
There are other conditions which would also impact. So these three-four are major but most of these conditions that exist there not only impact our industry here with services but also impacts our customers and they will start weighing in as well.
So, we have work to do and I am quite sure that many of those draconian conditions that are in the draft bill right now would get changed and we will be working towards offering alternative language etc in the next few weeks.
Q: This is at a time when these companies are already facing quite a bit of volume and pricing pressure. In your mind how much more margin pressures do you think these companies could face as a whole? Do you think many of them are now veering towards single digit volume growth as opposed to the double digit that many of them have spoken about for the year?
A: Margins and growth are two different issues. Margins are very company dependent in terms of where they are and what investments they are making in terms of their selling, general and administrative (SG&A) cost and also in terms of their utilization. I am sure over the next few months the focus will be on improving efficiencies and getting utilisations up.
A lot also will depend upon where the currency is. Currently it is stable and we hope it remains that way but if there would be currency swings either way, it would have pressure on margins for us.
In terms of growth there are some fundamentals which are positive although uncertainties remain. However, the fact that we had started investing in Latin America, Middle East, Asia, countries like Indonesia, etc are growing. We are also seeing signs of countries like Japan opening up now; it is a large country and we have small volumes there.
So, there are some fundamentals that will drive our business up in the positive sense but we surely have to address hurdles. We can handle the market aspects but when it comes to issues like visas etc which would tend to disrupt our business model, those are the areas that Nasscom will be focusing on.
Q: There have been some disturbing takeaways from Technology Partners International (TPI) regarding what has been happening in terms of fresh deal wins and deal sizes. In that there hasn’t been that much by way of fresh deal signing in Q1, as also the size seems to be getting constricted. Are you getting the sense that we are headed into a tougher market in terms of pure deal wins going into FY14?
A: There are a lot of deals which are up for renegotiation in terms of time period coming together. Companies would look at vendor consolidation, which has always benefited the India model. However, the trend for deal sizes getting smaller, and people not taking very long-term decision has been going on for the last two years as well.
There is a new normal in terms of how we will do business. The deals will be smaller and that would mean that we would have to work harder. That is true not only for IT companies in India but also global companies. So, if you look at global service providers as well, we have seen some muted growth at this point of time.
Given the changes of technology and adoption that is coming in which are market need based; I would think that you should see some momentum coming there.
Q: The problem is that what we are discussing over here is not a midsized technology company where you could explain a one quarter aberration because a big client stepped away or some other anomaly which midcap technology companies are faced by. These are sector leading names which are talking about potential degrowth, which are talking about an extremely tough environment, which aren’t even confident enough of giving out a margin outlook for themselves. You mentioned that you are not looking to change your guidance yet. Are you going to be looking to do that by the end of earning season, is it a situation that you are watching or are you holding that 12-14 percent guidance comfortably?
A: I am sure there are only few companies left and we will watch them but I don't think at the end of Q4 results, we are going to be changing our guidance or altering it. We will keep a watch, we are discussing with our member companies as well. The time for review for us should be in September-October time frame unless something necessitates us to do that before.
With regards to the point that you raised, you are right that there have been some growth results which were not entirely in line with what the street was expecting. However there are some others who within this market environment seem to have done well. So, the fact that there are companies who are doing well is a positive sign, it does show that there is still dynamism in the market except that depending upon your strategy how you harvest that is very different.
We are quite sure that unless something worsens over the next one-two quarters, at this point of time the 12-14 percent should be achievable in dollar terms.