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Mar 16, 2017 01:36 PM IST | Source: CNBC-TV18

Rupee getting strong but IT industry can face the challenge; AI major concern: Tech M

The best performing currency is the Indian rupee trading at 16-month high and Vineet Nayyar of Tech Mahindra says it is a cause of concern but IT industry is resilient to manage this.

The Indian rupee is now one the best performing currency as it has appreciated to 16-month highs against the US dollar and how will this impact the information technology (IT) sector, Vineet Nayyar of Tech Mahindra has an answer to this.

“The upward movement of rupee is unexpected and a cause of concern,” said Nayyar and he hopes it to be temporary. “Sometimes enthusiasm gets ahead of economic reality.”

Reposing faith in the IT industry Nayyar said that the industry is resilient to manage this. In the near-term it may be a cause of concern but the long-term will bear no impact, he said.

It is observed that a one percent appreciation in rupee leads to approximate 1-1.5 percent decline in earnings for tech companies.

The IT sector is tackling with the H-1B visa row, where it is proposed for doubling the minimum salary of US H1-B visa holders to  USD 130,000 from the current minimum wage of USD 60,000, but according to Nayyar, this hiccup will only result in marginal cost increase.

He also said that the major challenge for the IT industry is not the rupee appreciation or US H-1B visa but artificial intelligence and automation.

However, the industry will not become obsolescent just because it is going through change.

Below is the verbatim transcript of Vineet Nayyar\'s interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal.

Anuj: We all know about the sensitivity of the rupee but I wanted to hear from you - what kind of impact are you pricing in right now with the way we have seen this huge move in the currency, which has been unexpected?

A: It has been unexpected and I hope it is temporary because sometimes enthusiasm gets ahead of economic realities. Yes, it is a cause of concern. I would be wrong if I did not state that, but does it keep me wake at night. No, because Indian IT industry is resilient enough to manage this as it has managed other storms. So you could see a quarter of up and down but in the long-term, and that is what we work at, I am sanguine.

Latha: The more medium-term problem perhaps is the US visa issue and the fact that the priority visa processing has now been suspended. How does that impact your company?

A: It will be narrated but the great advantage of IT is that we are location neutral whether I am working out of Hyderabad or Dallas or anywhere else, it doesn\'t matter. So what you may see is that in case there is a hiccup in the visas, more and more work move offshore and is going ahead with local employment. I mean cost may rise marginally but is the work going to stop. I do not think so.

Sonia: Coming back to rupee appreciation - some sensitivity analysis suggest that there could be a near term impact of around 30-40 bps on the margins of some of the larger IT companies like yours. Is that a reasonable estimate or do you think the impact could be a bit more minimal?

A: If I may make an honest confession, I do not compute these things or I do not bother myself. I look at the trends and if there is a minor oscillation in the next few months, it doesn\'t worry me. What worries me are the fundamentals of the industry and how we are preparing to meet that and that is what we are focused on.

Anuj: What about business momentum because post Trump taking over, have you seen any kind of impact? IT industry was already struggling last year in terms of deals, pricing but have things got any worse or do you think things are looking up?

A: Let me tell you fundamental of business; it\'s all ways a struggle. I haven't seen any impact so far. We have large number of customers in the US. It's an important part of our portfolio but I haven\'t seen any of these cascading down to the industry. The industry is going on as usual.

Sonia: It is now the season of buybacks. First we heard from Tata Consultancy Services (TCS) then Cognizant and from HCL Technologies a well. You are sitting on Rs 5,000 crore of cash. At any point would Tech Mahindra also be interested to do a buyback?

A: This is very sensitive information, I cannot comment on it. At this point of time all I can say is that like every other factor we look at it and the decision is yet to be made.

Sonia: Any idea on what you would be looking to do with the cash because you have been making a lot of acquisitions in the past, any more on the anvil?

A: Acquisition is a part of our policy for growth and if we see anything relevant, we will go ahead with it as we have the cash but as of now we do not have anything in mind.

Latha: Digital business or social, mobile, analytics and cloud computing (SMAC). What is your strategy? What kind of investments and artificial intelligence or digitisation is your company making to tackle this in a medium-term basis? What are your plans over the next two-three years?

A: We are very much in it. We are working in this area. We have started working with our multiple clients on this and we are going to be heading towards 15-20 percent of business out of this. This is a real issue. I do not see visas or Trump as a real issue. I see this as a real issue, the cataclysmic change which is happening in the industry and whether Indian industry can move with it. And whatever little I have seen, I think we have made good progress and we do not think this industry is going to become obsolescence just because technology has changed or made a huge jump in the last few years.

Anuj: Since you have a lot of European presence as well, we are now in the last lap of the actual Brexit process. How have things been in Europe and the likely impact from here on?

A: There are always issues but I haven't seen anything directly emerging out of Brexit. There are currency movements, there are multiple other issues but Brexit as such has not impacted us.

Latha: I have two questions - one, the near term. There are two headwinds which as you rightly say are transient and minor, the visa cost as well as the currency impact. How much might it shave off in terms of margins over the next couple of quarters and the bigger investment that you are making in digitisation? What might it mean in terms of revenues and margins over the next couple of years? Should we get used to lower than historical average?

A: In so far as the margins are concerned, obviously there are lot of efforts which are going to go into getting on to the new platforms which are emerging but we are well on our way to do that. At the moment as much as 20 percent of our business is possibly from these new areas. I think the margins are decent. The only implication I think in long-term is going to be in the intensity of manpower rather than in terms of profitability.

Latha: You mean you will use more sophisticated manpower, will the cost go up?

A: No. I mean the intensity whether it is artificial intelligence (AI) or any of the other new technologies, the use of human being is going to reduce - that's on one side. On the other side the fact is that it is going to become so universal and its need going to go so much that that may neutralise it but what will come out in the wash, we do not know but one thing is clear that the requirement of guys on the desk is going to come down as we go forward but almost every aspect of the global economy will be through AI and stuffs like that and what comes out in the wash is still not quite clear.

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