IT not out of woods but starting to see recovery: TPI India

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Siddharth Pai, Partner and Managerial Director of TPI India, said that even as India's IT sector was still not out of the woods, one was seeing signs of recovery. "From our outlook perspective, what we are seeing is an increase in the pipeline definitely, but typically this increase in pipeline takes a good six-months to cook," he said. "So what we have seen in this quarter is better performance, to speak, or less bad performance really is probably the right way to characterize it. This is a function of how these companies have managed their cost based either cutting out additional sales offices that weren't needed or holding back on this expense. I do not believe they have yet had a significant uptick in revenues."

Here is a verbatim transcript of Siddharth Pai's exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: Whether it was TCS or Infosys we did notice a certain spring in the step. As far as their customers are concerned they will face the worst situation. What is your own outlook on first banking, financial services and insurance (BSFI) space?

A: From our outlook perspective, what we are seeing is an increase in the pipeline definitely, but typically this increase in pipeline takes a good six-months to cook. So what we have seen in this quarter is better performance, to speak, or less bad performance really is probably the right way to characterize it. This is a function of how these companies have managed their cost based either cutting out additional sales offices that weren't needed or holding back on this expense. I do not believe they have yet had a significant uptick in revenues. Especially if you take a look at it in dollar terms, when you correct for the rupee or you take out the fact that the dollar is actually depreciated over the last several quarters against the rupee the performance in dollar term it is significantly not better for the topline. The fact that there has been 2-3% increase in the bottomline is more an internal focus on the cost rather than a significant uptick in revenues. So I do not believe that the IT sector in India is out of the woods just yet but we are beginning to see signs of recovery.

Q: How would you look at the way cost efficiencies can evolve? Do you think there is more headroom in cost efficiencies and is there more headroom in moving more clients or newer clients offshore. You spoke about revenues not really improving - how is the next quarter looking to you? Will you see improvement in that space?

A: Let me start with the last question first because that is on most people's mind. Like I said, it takes a good six-nine months for many of these deals that are in the pipeline to actually close. So are we expecting a significant uptick in this coming quarter in terms of actual revenue? I think the answer to that is no, the fact that the pipeline has begun to fill up means that we will probably see this by the end of this year. With respect to the headroom questions, there is only so much that you can squeeze out of the lemon so I think there are revenue headwinds that you can do certain things on higher level cost, higher level people and so on. I think there are a lot of things we have not necessarily seen in the media but many of these firms have got rid of some of their people onsite as well as rationalized what the work force looks like.  The question is, how much more can you squeeze that lemon? I do not believe that much that particular lemon can be squeezed. Instead of moving more work offshore as concerned, there is a limit. I think we cannot forget the fact that there are protectionist sentiments that have come up in the US and to a lesser degree in traditional markets like the UK. So people will have to be careful as far as that is concerned, because I think there is also an expectation that, India heritage companies need to invest in the countries of consumption. So in other words creating more jobs locally onsite and not offshore will be the expectation for the next several quarters. So that is a balance which they will have to play as well. So my view is that, not much more headroom on cost or offshore.

Q: Fundamentally the origins of most of these companies starting with Infosys, TCS was graduating one platform to the other or just maintaining legacy system like main frames etc. but there are many structural changes happening in US. There is big debate about moving to open source serves rather than standalone systems. How is that going to impact some of these companies?
A: There has always been a promise of legacy systems being moved up but in my experience I have seen systems that have been out there for several decades, they have just had some incremental changes to them rather than fundamental changes. A great example is to take a look at when what happened, when the Internet came through about 15 years ago and everybody said legacy systems were the thing of past, but they aren't. So I think there will be a move to new platforms, the ability to cloud computing, some of the newer open source technologies which is great but I don't see necessarily the services aspect of either cloud computing or open source which is going to reduce tremendously.

We might actually change where the work is being done in terms of the machines themselves but the fact that human intervention is still going to be needed whether the work is in the data center or whether work is on the Internet that is not going to change much. As a matter of fact that is probably good news for off shore or off site work.

Q: I don't know if you look at the world of IT companies that way but would you place bets more on the heavyweight IT companies, given the tense environment or would you say that it would be the midcap IT companies that could perhaps do a better job, given that they could be more nimble? 

A: That's a difficult question to answer. I think some of it will come out in terms of what the results are going to be over the next quarter or so. I think the fact that there is a larger established base for the larger companies is actually something that's going to work in favor. In fact those that have some kind of revenue visibility because of the existence of longer term contracts are actually the ones that are going to do better during a downturn and during a recession. So, I think we have already seen that and more  than that the portfolio of business move, from being ad hoc project oriented or staff augmentation oriented business to longer-term outsourcing oriented business, the better for us. It will be lower margin work obviously because the sustainability of that revenue and the visibility that we have into the horizon for that revenue is clear. So though its going to be a lower margin, it will be sustainable and I think it's the larger firms that have that advantage.

Q: Can we quantify how much of the business is going to remain in the next 2 to 3 years from legacy? Are many of these companies able to graduate to open source, where a lot of stuff is now free, could you put a number on that? How could that impact, the bigger players like Infosys, TCS, Wipro then down the line?
A: I don't know what that number is. I am sure there are people who are out there trying to figure out how much the shift may actually be. The fact of the matter is that the focus needs to be on the services component, not necessarily where the software is going or where the platform itself is going because from an Indian perspective we don't really play very much over there. It is the Oracle's of this world; the Microsoft's of this world or the hardware manufacturers like the IBMs and the HPs, part of the business that would really need to consider that equation a lot more. The point is regardless of which hardware it's running on, regardless of which software or which network it's running on there is still a need for human intervention in services that will continue, if anything that will be greater. I wish I could put an exact number to what that is going to be but my expectation is positive in the long-term for the services part of the market.

Q: Is there a trend of more Indian businesses or Indian customers giving business to the Indian IT service companies. One sector that has come out looking good after the year long term turmoil has been the Indian banking space are you seeing a flow of orders very quickly?

A: Yes, absolutely. Our numbers indicate that India is actually one of the largest markets. If not the largest market for outsourcing services, demand market for outsourcing services in Asia Pacific, so that means there are a lot of Indian corporates, significantly considering what they can do by using outsourcing as a business tool. So in fact there is a lot of work right here in our backyard. I think we have come out of the last several years that we have to take a look at.