Indian IT industry is in the midst of a slowdown, which may lead to slower job creation but the situation isn’t dire yet, says Pravin Rao, Chief Operating Officer of Infosys in conversation with Malini Bhupta of Moneycontrol.
How do you expect FY18 to be and why are revenue forecasts becoming so hard?
We are seeing a cost take-out by clients as they are asking vendors to take a cost take-out for existing work by 20-30 percent. But we expect this will play out over a 3-5 year period. Earlier, clients would spend 70 percent on running existing business and 30 percent would be on new technologies. Now, tech spends on running the existing business is down to 50 percent but the pick-up in new technologies is not keeping pace.
The traditional core business is seeing huge commoditisation and pricing pressure. Clients are throwing open for rebidding most of the deals that are coming up for renewal and asking for 20-30 percent cost take-out. While you may have been a successful partner, clients are asking for a cost reduction of 20-30 percent due to commoditisation of traditional core services. At the same time, the pace of reinvestment is happening at a much slower pace compared to the cost take-out.
If clients are driving down costs by 20-30 percent over the next 3-5 years, it will impact your revenues if digital revenues don’t keep pace. How will you deal with people in the face of such a slowdown?
Our belief is that today 60-70 percent of the work we are doing will lend itself to automation over a period of time. And, this will start requiring fewer people but at the same time a lot of other work that is being done is still people-intensive. We may not require the incremental number that we used to require in the past. If you look at our net additions in FY16, it was 16,000 and it was 6500 in FY17.
This is a reflection of slowing growth and better operational efficiency. Secondly, it also shows that our utilisation is improving. Our revenue productivity, too, has been improving. Now, performance expectation is much more stringent.
Today, with slowdown you need to be much more stringent on performance. Also, with reskilling existing workforce the net addition will be minimal. There are no mass layoffs. The performance expectation is much more stringent. My view is that if slowdown continues for a long period of time you will start seeing it but right now it is a lot more hype than warranted. Job creation will start slowing down if this slowdown persists.
Can you afford to have a bench strength like in the past? And, why are you not willing to pay more than Rs 3.5 lakh to entry-level engineers?
We do that because clients cannot wait. To avoid that we need to figure out just-in-time hiring. We have tried to move away from it but the quality of fresh graduates is not that good. For a small percentage of people we have started paying Rs 8 lakh as these are people we need to work in next gen technologies. If you are recruiting 20,000 people you don’t need that kind of caliber.
Foreign investors are also now talking about large players looking at selling out. What is your view on that? Would Infosys consider an M&A?
We are still focused on inorganic growth. We are looking at next-generation services company. It will be a small acquisition and valuation may be high. There is no value in recruiting another company like ours because then you will end up spending USD 3-4 billion but growth will further get stressed. Normally, in an industry, consolidation happens when there is an overall slowdown and if industry growth settles at 2-3 percent then growth will only happen by consolidation but IT industry is far from it.
What about protectionism and how will that impact your business model?
Clients were concerned and they did not want to be on the wrong side of the [US] President so there was a slowdown last year and early part of this year. While that is behind us, protectionism is here to stay. We have always had a model of 70 percent offshore and 30 percent onsite but the challenge is to find the talent. But this will force you to make compromises and relook at models. We have publicly stated we will recruit 10,000 people in US over two years. The talent mix in the US will have experienced people and freshers from college. This is a change in our model.
What are investors most concerned about?
Investors are trying to understand the slowdown and how long it will persist. The slowdown is expected to continue for the next 12-18 months as clients are not reinvesting in new technologies at the same pace. Investors are also concerned about growth and if it will remain at 8 percent or become 10-12 percent. Will Indian IT players transform themselves?
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
