Zensar safe from Japan crisis; sees FY13 income at Rs1900cr

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As Accenture's guidance outlook indicates that strong demand will continue in the IT sector; Ganesh Natrajan vice-chairman and managing director of Zensar Technologies says, "the company is on an agenda to double the revenues in the three years. "We expects FY13 revenue to be at Rs 1900 crore. We plan to do so both through organic as well as inorganic growth models," he says.

In an exclusive interview with CNBC-TV18's Soniya Shenoy and Anuj Singhal, Natrajan shares his outlook on the IT sector and on Zensar. He says that the Japan crisis is not likely to affect his company's performance. He believes that the IT sector in India "will grow at about 18% this year and about 20% next year." He adds, "the new deals of the company are coming in at 4% to 5% higher pricing."

He also says that though the company sees positive signs from US, "we continue to focus on the emerging markets (EMs)."

Below is a verbatim transcript of Ganesh Natrajan's interview with CNBC-TV18's Soniya Shenoy and Anuj Singhal. Also watch the accompanying video. 

Q: How does the demand scenario looking both in terms of deal pipeline and client budget in CY11? Is there any kind of significant improvement that you are witnessing?

A: We are witnessing improvement because the demand scenario looks positive. The sector will grow in India at about 18% this year and a growth of 20% next year is on the cards. The two positive drivers -the pent-up demand for offshore outsourcing is been released at this point of time and the prices are hardening,, so new customers are willing to talk about new pricing. I certainly expect that the sector will grow substantially better next year and even so this year.

Q: Is there any more acquisition that is on the anvil you are planning?

A: We are right now in the middle of 100 day integration plan which finishes on April 8 but we are excited as we are seeing good demand. We are setting out an agenda to double our revenues in three years that means from Rs 950 crore as FY10 revenue, we intend to look at Rs 1900 crore plus by FY13 through organic as well as inorganic growth model.

Q: What kind of an upward bias are you seeing on pricing and in terms of stability you think the pricing structure has stabilised compared to what it was about four to five quarters back?

A: I certainly think it has stabilised. There are concern areas like the Middle East, Japan and even Africa, which is a big market for us because visa regime in South Africa is becoming quite difficult. However, if you look at the traditional markets, largely US and UK, you will find that existing customers are stabilising and new deals are coming in at 4% to 5% higher pricing. It is not going to compensate for the fact that input costs are going up, however, it is a better signal and a better trend compared to the last couple of years.

Q: What about employee cost because that is something we have seen all the companies facing pressure. There were even reports that a company gave 200% bonus of the basic salary to its employees. Would that dent into margins quite significantly for a company like Zensar?

A: Cognisant is a fantastic company, a 40% growth last year is an amazing performance so their employees surely deserve 200% increase. However, I don't think there is going to be a trend. You will probably see 9% to 10% average salary increase this year. Zensar will go the full range, which we did even last year. It will be all the way from 5% to 6% to 22% for high performers. However, we have to factor that in, so employee cost will go up and everybody will factor that in.

We are aggressively focusing on R&D to build intellectual property so that every incremental dollar of revenue is not based on manpower addition. However, it is continuing to be a challenge and as successful companies grow to maintain profitability, we will have to focus on non-linear revenue growth.

Q: The movement in the rupee in the past couple of months has been giving heart ache to IT sector. What is the outlook in terms of rupee given the fact that it may just stay at 45 levels for a while. How much of a pressure does that point out to be? For companies like yours what would the strategy be?

A: My expectation is that the rupee will still stay around the 45 mark for the next year or so because we have our own pressures in India. However, in the longer-term all of us will have to be prepared for something in the region of maybe 40-42 to the dollar. In this quarter, we have had some negative surprises, in terms of other currencies; however, next year will be fairly stable. I don't see any substantial shifts on either way and we have to factor it into our budgets and our profit patterns, going forward.

Q: Are the operations of your Japan office stable? Will the recent crisis impact your guidance in anyways?

A: Not at all, because the project lead we had in Japan has come back temporarily and they will expect to go back by probably in mid-April. It has delayed implementation of a couple of projects because customer-user acceptance has been delayed to a certain extent. However, I am fascinated with the way Japan has come back on its feet and the almost near normal situation that we are seeing in Tokyo is absolutely amazing. Given the resilience of that country, I don't see any big impact in the medium-term on the industry and certainly they are going through tough economic times. The crisis not going to have any impact on any company's fortunes next year.

Q: How much would your margins suffer because of your acquisitions and eventually what kind of a fillip are you expecting to see in revenues brought about from these two?

A: I don't want to comment on the current quarter because we are too close to the end of the quarter. However, if you look at two year horizon, at FY10 we had Rs 950 crore plus revenue and we had a 13% PAT. The goal is that this year and next year, we expect our outlook of FY13 to cross Rs 1,900 crore and also to retain 10% and above PAT. It will be lower in the next year because we are integrating but we are very confident that Akibia acquisition will drive significant revenues in one of the fastest growing areas of infrastructure management and the dual shore strategy will help us to drive much more profitable business.

Q: If you can give us an indication, you spoke about the pickup in discretionary spend, for companies like yourself where geographically are you seeing that increase and even overall for the industry. What is the general sense, in terms of geography, where the discretionary spend is picking up?

A: Companies have diversified their geographical baskets, for instance if you look at our own revenues - 22% comes from Asia and Africa and we will continue to focus on emerging markets. At the same time, nobody can ignore US and the fact that there are positive signs emerging out of the US is good news. Europe will be dull for the next year or so, Japan will be probably at best flat. Hence, our focus is going to be Asia, Africa, and large focus on domestic market and also making sure that we have existing customers and new customer acquisition in the US is substantial.

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