SD Shibulal, MD & CEO at Infosys is a pleased man after the IT bellwether surprised the street with better-than-expected numbers. He spoke to CNBC-TV18 about rebuilding the company, management reorganization and filling vacancies created by high-level exits.
He confirmed that Ashok Vemuri has taken charge as head of global sales after Basab Pradhan's exit. Pradhan had recently quit the company to explore opportunities elsewhere. Infosys has always seen high attrition rate in the first quarter but the company hopes to see a reduction in the coming quarters.
The company announced its first quarter numbers today following which the stock rallied 15 percent.
Below is the verbatim transcript of Shibulal's interview:
Q: Let me start by asking you about what happens from hereon because the last conversation that we had you said it will take a couple of years to actually rebuild Infosys and you didn’t specify very much then. Let me start by asking you about the top level exit of Basab Pradhan, have you found a replacement for Basab yet?
A: Before I answer that let me give you a broad overview of Q1. We have done reasonably well in Q1. We grew 2.7 percent. Constant currency we grew by 3.4 percent and we have seen growth all around. Our topline grew by 11 percent, our top 10 grew by 4 percent, our top 25 also grew by about 1.8 percent and our large deal wins in Q1 has been pretty good. We have won seven deals of USD 600 million in TCB. So, from a margin perspective we have remained stable, 23.5 percent quarter-on-quarter (QoQ). Now, let me answer your question. Your question was about exit of Basab Pradhan. As we said he has resigned to look for exploring opportunities outside. Ashok Vemuri has taken charge of Basab's portfolio in the interim.
Q: So, you are confirming that Ashok Vemuri has taken over charge from Basab Pradhan but that is only an interim measure?
A: It is an interim measure. We will come up with plan for the long-term in the next couple of weeks.
Q: What else can we expect in terms of management reorganization because the last conversation that I had with you and Murthy you did allude to the fact that there will be changes that we will perhaps see on the sales and marketing side and other management changes as well? Besides Vemuri taking over from Basab Pradhan what else can we expect now in terms of the management reorganization?
A: As I said that Ashok Vemuri taking over is an interim measure. We will look at long-term pretty soon. I can tell you one thing, you will be the first to know as and when we make those changes.
Q: There has been a lot of speculation over the last couple of weeks on Infosys being on the prowl looking at acquisitions specifically domestic acquisitions. Is there any truth to those rumours– I don’t want to name those companies but you perhaps know who I am talking about?
A: Let me not respond to rumour. At the same time, acquisition is strategic for Infosys and it has to be an acquisition which will put two and two together and create five for our clients. We have done one Lodestone; it seems we are on plan. The integration is in progress and so far it seems to be doing well and on plan.
Q: Can we expect an acquisition from Infosys perhaps as early as the coming quarter in the domestic market specifically?
A: As I said acquisition is strategic. You will be the first to know as and when we do it. Acquisitions are long-term processes, they are not short-term.
Q: We are seeing a lot of churn as far as the IT deal street is concerned. You have actually been able to bag about seven clients that you just talked about in excess of USD 600 million. Are we likely to see more additions on account of the kind of churn that we are seeing in the IT basket there?
A: These are not seven clients; these are seven deals which we have won in Q1. If you look at the last three quarters and that means the second half of last years, we have started seeing good wins in the business and IT space.
In the second half, we had won about a billion dollars of revenue and this quarter we have won about seven deals of USD 600 million. But it is very important to note one thing; these are long-term deals i.e. 3-5 years. So, if you win a billion dollars, it will only give you about USD 200 million in the second year.
Usually, your realisation in the second year is only 20 percent. Going back to your question, it is true. If you read the industry reports, a very large portion of the outsourcing deals are rebids and generally they tend to be price sensitive.
Q: What is intriguing is that after a strong performance in the first quarter you have chosen not to change your guidance, not even up the lower end. 6-10 percent is what you are sticking with. Are you reverting to the old Infosys penchant for under-promising and over-delivering?
A: The reality is that over the last three quarters, we have seen volatility in our own performance. We did very well in Q3. Q4 was lukewarm and then Q1 we have done reasonably well. While we do not like it, we work towards creating predictable performance.
We have seen volatility in our own performance over the last three quarters. The other reality is that we have a large dependency on discretionary spend. It is definitely much above the industry average. Our consulting and system integration revenue gives us 34 percent of our revenue.
These two factors plus we are operating in a certain challenging environment. The US Immigration Bill is in progress. We have just seen a change in the regulatory environment in Australia which will definitely create delays in staffing in Australia. We have seen some changes in Canada and currency is also causing uncertainty.
This quarter alone we lost USD 13.7 million because of cross-currency movements. So we have to consider these factors when we look at the future. While we have done reasonably well, we remain cautiously optimistic about our future. We felt that it is not prudent to make a change to our guidance given one quarter's performance.
At the same time, there is one thing to note. In constant currency terms, our guidance is 7-11 percent. We will lose USD 72 million this year because of the cross-currency movements from Q4-Q1.
Q: Since the currency world is now altering considerably with a lot of churn, a lot of volatility will you be changing your hedging strategy?
A: Our hedging strategy is to hedge for expenses for the next two quarters. We have consistently followed the same strategy. This quarter we have done fairly well with that strategy so I don’t see a change in our hedging strategy at this point in time.
Q: You were speaking about how in constant currency the pricing was flat but in reported currency pricing was down a bit. How are you looking at pricing pressures hereon, will you be able to hold your own?
A: In constant currency terms, our pricing has remained stable Q-o-Q. In the reported currency terms, it came down because of cross-currency movements. If you look at our growth, we are focused on growing all three parts of our business; consulting and system integration, business and IT operations, products and platforms. It is very much in line with our strategic direction.
In the business and IT operations space, large outsourcing deals are price sensitive. They are more price sensitive when they are rebids. So what happens with these large outsourcing deals is that they are margin dilutive in the beginning. Our plan, our hope is that they will be margin neutral during the life of the programme.
So that we do interventions like productivity improvements, efficiency, automation, tools and reuse, various methods to make sure that they are margin neutral in the life of the programme. However, when you are winning these large opportunities, they will be margin dilutive in the beginning.
Q: Are you preparing the market therefore for a near-term pressure on margins?
A: If you look at our margins this quarter, it is exactly same as last quarter. However, one has to remember this quarter the rupee has depreciated but we offsetted that for the compensation increase which we gave onsite and for sales. So, last quarter we had given enough compensation increase to our onsite folks. In the middle of this quarter, as of May 1 we have given a compensation increase for our sales folks, which is 8 percent.
So, the currency benefit got offsetted against the compensation increase which we already gave. At the same time we have said that we are going to give an 8 percent increase for our offshore staff starting July 1. We are also going to give compensation increase of about 3 percent for our onsite folks who were not covered in Q4.
This will have an impact of about 300 basis points on our margin in the next coming quarters. We are definitely focused on making sure that we do interventions to mitigate this impact but that is yet to be seen. So, the compensation increase which we have given or going to give will have an impact about 300 basis points on our margins.
Q: The total contract value in Q2, the deal sizes are expected to come down 27 percent on a Q-o-Q basis and even the large deal wins are expected to be much lower in Q2. Can this deal momentum in Q1 sustain even coming quarter? With respect to the Q1 deal wins; was there any benefit on account of deal push outs from the previous quarter?
A: If you look at the second half of last year, we won a billion dollars of large deals, but many of them were in Q3. In Q4 they were substantially lower than Q3. Q1 we have seen good traction as well as the large deal wins are concerned. It is not right to look at Q-o-Q on these matters.
One needs to look at secular trends. If you look at the last three quarters, USD 1.6 billion of win is a good traction to have. If you look at Q-o-Q, you will see these fluctuations. We do have a good pipeline but we have to win them. They are quite competitive in the market. We remain cautiously optimistic.
Q: How do you explain this higher attrition, what is it symptomatic of?
A: Q1 is always higher attrition. If I look at the absolute numbers of attrition in Q1 this year, it is very similar to Q1 of last year. The reason being Q1 is people leaving for higher education.
Q1 is when people go for higher education across the globe, they leave for universities in India, they leave for universities abroad. So the Q1 numbers are very similar to my Q1 numbers from last year. That is number one.
Secondly, we have given compensation increase across the organization. So, with Q4 and Q1 together, we have covered entire organization with compensation increase and I would tend to believe that these are reasonable compensation increases. We are also doing multiple other interventions to engage with our employees. So I am hopeful that the attrition will come down over the next few quarters.
Q: Hypothetically, if the outplacement debarment clause in the Immigration Bill comes through and it gets passed by the House, very hypothetically; then would you tell us what kind of an impact it will have on Infosys per se?
A: First and foremost, this is an industry issue and not an Infosys issue. The entire industry will have its own implications if the Bill gets passed. Two, it is very difficult to predict what is going to get passed. Senate has passed their version of the Bill, House is in progress and finally if both parties – if House also passes it has to be reconciled and then finally it has to become law.
You don’t know what clauses are going to be in what shape or form in the final Bill. It is an industry wide issue. First thing, we need to do is to watch the progress of the Bill, we are. Two, we need to plan for all the eventualities which we are and number three we need to be in touch with our clients, we are doing that.
We are in constant conversation with our clients and they do understand that this is an industry issue. It requires joint planning between the client and us to make sure that there is no interruption to the service delivery and that is what we are doing at this point in time.
Hypothetically, if the outplacement clause comes through that will be a serious challenge to the way in which we operate today. There are multiple mitigation acts that one can take.
One is to make sure that we have lot more local employees. Two, is to make sure that we apply for green card. Three is to see that whether we can reduce our onsite. Four, is to see whether we can go into a multi-site environment with certain employees in the client side the remaining in office of ours in the proximity of the client or in the same time zone and offshore.
So, there are multiple ways with which one needs to look at it. Once again I am telling you that everything is uncertain and all we have our possible plans.