Sep 08, 2012 12:30 PM IST | Source: CNBC-TV18

Scouting for acquisitions in product, platform biz: Infosys

SD Shibulal, the current Chief Executive Officer and Managing Director of Infosys, is one of the seven engineers who launched the company in 1981 by pooling in USD 250 million to make what is today one of India's largest IT giants.

SD Shibulal, the current Chief Executive Officer and Managing Director of Infosys, is one of the seven engineers who launched the company in 1981 by pooling in USD 250 million to make what is today one of India's largest IT giants.

As the global business environment continues to be challenging, Shibulal said that there are delays in clients' decision making process. "Larger opportunities are going through multiple levels of scrutiny and we are continuing to see it. In my mind, there have been positive and negative reports but I am not seeing a material change in the environment in which we operate," he said.

Given the competition and the tough environment, many IT companies have been slashing prices to win deals. However, Shibulal maintains that their focus is on delivering value. "One needs to look at pricing as a portfolio. Looking at pricing on a deal-by-deal basis is not possible. One should remember that lowering prices probably is one of the easier things to do. But I clearly believe that the more important thing for us is to deliver value and that is what we are focused on. We want to make sure that we are delivering superior value to our clients."

Furthermore, Shibulal informed that the IT major is scouting for acquisitions to expand its product and platform businesses. “It is a very important part of the strategy because in the olden days, one used to talk about consulting acquisitions; the importance of that has come down because we have built our consulting and system integration capability. An acquisition in continental Europe will make sense. There are areas which are very relevant to acquisition. We are talking about taking 6.5% revenue that is what we get from products and platform from today to a much larger base. So acquisition makes perfect sense. There are various areas which we have identified and strategic to us, and we are very focused on looking at acquisitions."

Below is an edited transcript of the exclusive interview.

Q: It has been a fairly rocky ride over the last 2-3 years. Ever since you took over, you have been busy; the market has been volatile, clients have been cutting down expense. How have it been since you took over till date?

A: As I see, your actions are driven by 2-3 things. One is the strategy which you are pursuing as a corporation, so Infosys is definitely on a new strategic path. Last year, we launched Building Tomorrows Enterprise, a new strategic path and direction. It is a framework for innovation and co-creation. We are seeing excellent traction. The recent industry reports are endorsing our strategic direction. As a CEO, your actions are driven by the strategic direction you are taking.

Two, it is driven by the environment, which has been challenging. There has been volatility in the environment and there has been volatility in the US and Europe, and that of course, drives some of my action and my style. These are the other factors which go into your actions.

Q: In the last two quarters, you had certain amount of revenue decline. Does that worry you or is this a one off considering the market is volatile at this point?

A: If you look at the last quarter, our guidance was USD 1771-1789 million; our revenue was USD 1752 million. There are two factors one needs to consider. One, we lost USD 13 million because of inter-currency movements and that is not in our control. We took a one-time charge. If I normalise both of those, I will end up somewhere around USD 1780 million, which is right in the middle of the guidance, approximately 0.4% growth if I had done that.

Irrespective of this, one also needs to look at the volume growth. Last quarter, we grew by 2.7% in volumes.

Q: Are those challenges still present in the next quarter? Are clients still either backing down on IT spends or cutting down contracts?

A: In the beginning of this quarter when we actually gave guidance of at least 5% for the year, we had said that the environment is volatile; there are delays in decision making. Larger opportunities are going through multiple levels of scrutiny and we are continuing to see it. In my mind, there have been positive and negative reports but I am not seeing a material change in the environment in which we operate.

Q: Are you on track with the 5% guidance at least for now?

A: Our guidance is based on a statement of fact as we see it. In the beginning of the year, we have visibility for 65% of the business, we have to make up 35% of the business during the year. For a quarter it is 95%, but 5% of USD 1.8 billion is USD 90 million, which has to be made up in approximately 50 working days. At this point in time, there is no material change, which will lead us to revisit the guidance.

Q: You have around 86% exposure from the recession-hit markets of US and Europe, are you now gradually reducing this dependence and increasing focus on emerging markets?

A: Definitely, we are expanding our presence in other markets but one should also keep in mind that US, by far, is the largest spender of technology and you have to be part of that market. When you look at Europe, it is true that Europe is going through certain challenges but when we look at our revenue profile; 10% of our revenues come from continental Europe, which means continental Europe can grow for us. This means it is actually our emerging market. So we are investing in Germany and France. We have five countries in continental Europe where we are focused on - Germany, France, Switzerland, Belgium and one more. We see these five countries as growth potentials. Even this year, we expect that Germany and France will grow above our average.

Having said that we are also growing in the other parts of the world; we just announced the India Post deal in India. We have taken a different approach in India; we have taken an approach of a pure system integrated approach where we are rebuilding the platform. We are delivering intellectual property to our clients and that is also doing very well.

Q: This is has been an eternal investment complaint that Infosys has been conservative in tapping into its USD 4 billion cash pile. When are you looking at a big acquisition?

A: Firstly, we are actively looking at it. Second, it is a very important part of the strategy because in the olden days, one used to talk about consulting acquisitions; the importance of that has come down because we have built our consulting and system integration capability. An acquisition in continental Europe will make sense. There are areas which are very relevant to acquisition. We are talking about taking 6.5% revenue that is what we get from products and platform from today to a much larger base. So acquisition makes perfect sense.

Our addressable space for acquisition has enlarged considerably when we launched this new strategic direction. We are looking for acquisition in public service because that is another area that we have opened up. We have set up a subsidiary in US called Infosys Public Service, so it makes sense to acquire something there. There are various areas which we have identified and strategic to us, and we are very focused on looking at acquisitions.

Q: How much would you spend if there has always been the trajectory of anywhere more than USD 250 million? How much are you looking at spending from the deal that you are talking to right now?

A: The way I would say, it is slightly different. I would say we are comfortable because we are a USD 7 billion corporation and we are comfortable acquiring upto 10% of our revenue. Valuation depends on various things, it depends upon the type of acquisition, the type of deal you are closing. But when I look at acquisition, I look at how much we can easily integrate. I am very confident that we can integrate upto 10% of our revenue.

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Q: Would you look at smaller niche acquisitions and maybe 3-4 of similar such deals?

A: We are looking for large ones also. We always do small ones, for example, we recently launched a platform that we acquired from one of our times, for whom we built it before and it was a very small IP acquisition. So we will continue to do those but we are also looking for big ones because if you want to move the needle in products and platforms, that will be quite large ones.

Q: By when can we expect a deal to be cracked?

A: Our teams are absolutely focused on it and are definitely working hard.

Q: Would it be within this year?

A: The right acquisition has to meet certain criteria, it has to be a company, which wants to be acquired, it has to be a company where we can put two ends together and deliver; it has to make strategic sense. As soon as we find it, we will announce the acquisition.

Q: The market is trying to understand why is the commentary of Infosys different from that of a Cognizant or TCS or HCL Technologies?

A: I think there are two-three factors. One is we are in a volatile environment, there is no doubt, there is volatility in US and Europe. Our clients are uncertain about what choices they need to make and that does reflect in our commentary.

Second is every corporation has a different strategy, different portfolio, different aspiration. The strategy, which we are employing, is meant to meet our aspirations. We definitely carry a different portfolio, we have a higher dependency on discretionary spend, our consulting and system integration revenue is about 30-31% which is one of the highest in the industry, so there is higher dependency on volatile spend.

We get about 34% of our revenue from financial services and we continue to get them. Some of those people are going through serious turmoil. From a volatility perspective, our exposure to the volatile revenue stream is comparatively higher by about 55% or so. That has coloured our commentary and behaviour.

Also, we have gone through a transmission. We have rolled out a new strategic direction. It has been a very good traction and recognition, we have reorganized ourselves, we went through reorganization of 100,000 people, we have new leadership in place. We have completed the transformation, we are in execution but the environment has changed. So that does reflect on some of the early resells, which we can acquire from the transformation. So one needs to look at these numbers and resells based on the portfolio, the aspiration of the corporation and the environment in which we operate.

Q: In terms of quarterly revenues, Cognizant had gone ahead of Infosys last quarter. But given the last 12-months parameter, Infosys is still much ahead but the gap is still less, does that worry you at all?

A: As an organization and as a CEO, I have to be focused on our aspirations and our strategy. We have always said that we want to have superior financial performance and we have defined it clearly. We have said that we want to grow above industry average and that is what we have done all along. One or two quarters don’t change that aspiration.

Secondly, we want to have one of the industry leading margins and we are purely on the execution mode. I am 100% confident that in the medium-to-long term, our strategies and our direction will deliver our aspirations.

Q: There has been talk in the industry that way too many people have been slashing prices to win deals. At any point, do you feel that you have lost out on deals in the whole prospect of not slashing prices and maintaining margins in retrospect?

A: One needs to look at pricing as a portfolio. Looking at pricing on a deal-by-deal basis is not possible. One should remember that lowering prices probably is one of the easier things to do. But I clearly believe that the more important thing for us is to deliver value and that is what we are focused on. We want to make sure that we are delivering superior value to our clients.

Q: In 2014, there will be another change at the helm. There has been a buzz that the next and the most obvious candidate is V Balakrishnan. Can you clarify on that?

A: This is a nomination committee decision. It's a very important decision. It is decided by the nomination committee, which is a full external board. Secondly, we have three people who have joined the board - Bala, BG and Ashok. We have 40 plus tier-1 leaders and about 150 tier-2 leaders.

The whole idea behind leadership development is to actually prepare them for higher responsibilities. You have the tier-2 leaders who are actually being prepared for tier-1 and tier-1 being prepared for higher responsibilities, and of course, the board members are prepared for higher responsibilities. That is a choice which the nomination committee has to make.

Q: There is no requirement for another round of organizational and strategic change as of now – it is only about being executing the strategic change that you are currently in the process of?

A: There will be minor changes here and there because that is part of leadership development as people take up new portfolios. That is a continuous process. But from a structure and strategic perspective, we are purely on the execution mode.

Q: You said that you will revisit wage hikes in October. Are you actually looking at giving out wage hikes in line with industry estimates post October?

A: What we said that we are postponing the wage hike. We will look at it on a quarter-on-quarter basis. We will look for higher visibility. As and when we have higher visibility, we will revisit the wage hike.

Q: Despite the wage hike problem, despite the fact that you hadn’t given out wage hikes, and industry-wide, the wage hikes were very tepid. Yet, people are witnessing margin pressure. What is the reason for that?

A: If you look at the last quarter, our margins were where we actually predicted it to be. Going forward, our margins will be within a narrow band of 50 to 100 basis points. If you look at this, right now, utilization is somewhere around 70% plus whereas we are quite comfortable operating at 78-80%. We are carrying the cost of additional bench of approximately 10%. If you can just increase the utilization; it will have a fairly positive impact on our margins.

Q: What is the kind of hike that you can expect in utilization?

A: We are quite comfortable between 78% and 82%. We have operated anywhere between 78% and 82%; we are at 70%-71% so it can go up.

Q: Has attrition gone up in the last two quarters?

A: Attrition remains stable. Q1 and Q2 is when people go for higher studies so usually you see seasonality in attrition during this period.

Q: I want you to clarify on some several reports that had come out on Mr. Vemuri actually putting in his papers. What is your clarification on that?

A: First of all, we don’t respond to rumours.

Q: But he is very much in the company, isn’t it?

A: He is very much in the company. He is heading actually one of our better performing units; manufacturing is doing well.

Q: No severe exits on a top-to-mid management level. Is that correct?

A: There isn’t any. Also please remember, if you look at any traditional theoretical framework on a very large transformation of this nature, any theoretical person will tell you that you will lose some people. In theoretical framework, it is 10%. In Infosys’ case, it has been 0.1% so we have done very well.

Q: We have talked about protectionism and higher visa cost. We have talked about how gradually you have to start hiring more onshore, which will impact your margins. But in the next one year, how much of an issue will these three factors have on the growth of the company?

A: On hiring locally, when you are expanding your consulting and system integration work, when you are trying to do more business transformation work, when you are trying to deliver business innovation, you will need local talent. I don’t think I can go to Germany and and say I am going to transform your supply chain and speak in English. This means it is very much strategic for us to actually recruit talent locally.

Q: Won't that increase your cost over there by default hitting margins?

A: Please remember, the cost of talent is not any different whether they are from India or local because we pay the same compensation for deputy and local hires. So as long as the onsite offshore ratio is not changing, there is no impact. If the onsite goes up then you have an impact because the margin profile of onsite and offshore are very different.

Q: The sense I got from one of your peers was that there is a lack of talent in US. While they would love to hire more locally, they need to look at increasing onsite mix – there is a lack in talent in specific areas in US. Is that correct?

A: There are certain areas where there will be lack of talent. In fact, we took the Foundation programme as a pilot and we did it in Detroit for 100 people. We chose people from the local area who have no background in computer science, no background in software. We conducted a programme along with Wayne Community college with 100 people for 18. We have absorbed few of them. So rescaling is a very important part and now we have done a pilot in US of rescaling local talent into this industry.

Q: Was there any amount of pressure in the US after the whole US issue that was happening, now that the verdict is out, of course the stock has also corrected?

A: We are not, in fact, we got the deals which we are closing. So, we do not announce all the deals. We closed Harley Davidson last year. We are co creating intellectual property along with our clients. If you look at our client base, we have built this business based on relationships.

Our clients are anywhere from one day to 15-20 years old. So when I meet these clients, they know more about Infosys than anyone else. They have been our clients for 10-15 years, they have seen us through ups and downs and they are very supportive to us.

Q: Any more client addition in this quarter in US and Europe?

A: We are adding clients. I cannot give you the exact number but we are definitely adding clients and we have also closed deals. So in this kind of situation where there is media attention, it is our responsibility to communicate. We have been in very close touch with our clients and also with the employees, with the industry and the markets as well. So we have been taking extra care in communication.

Q: Are we seeing any major client cuts in US and Europe?

A: We have not lost any clients; it was one-time charge on the programme, not on the client.

Q: Going forward, when do you expect the IT industry and Infosys to stabilize from an overall global economic point of view?

A: All my discussions eventually lead to a protracted recovery. So, the timeframe will be slightly longer than normal and we will slow a slow recovery.

Q: Is there any timeframe that you have in mind for yourself?

A: From our perspective, it’s also a reflection of our strategic direction and our aspirations. So when I look at our strategic direction, the execution path we have taken and the agility of the execution which I am seeing, I believe that medium to short-term we should be in place.

Q: Do you miss Mr. Narayana Murthy on day-to-day level?

A: As Mr. Murthy had said it clearly that he is available for advice at any point in time, I have been reaching out to him for advice as and when I feel the need.

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