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Apr 13, 2012, 03.28 PM IST | Source: CNBC-TV18

Q4 Results 2012: Shibulal defends muted guidance in 'new normal' environment

Despite their muted guidance for the year ahead, Infosys management tells CNBC-TV18 that they still aim to grow above industry average.

SD Shibulal, CEO & MD, Infosys

Despite their muted guidance for the year ahead, Infosys management tells CNBC-TV18 that they still aim to grow above industry average.

March saw one of the biggest slip-downs and high volatility for India’s second largest IT services exporter, due to which CEO and MD Shibulal forecast FY13 growth at 8-10%, which is below NASSCOM’s 11-14% growth for the IT industry. “Our visibility for the entire year now is only 65%, and with lack of client confidence on global growth and no visibility on client spending, giving guidance itself was a bold statement,” he said.

For FY13, Infosys forecasts a fall in profit margins of 50-100 points. However, Shibulal says the drop in margins could be higher in Q1 due to higher visa costs.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: You are guiding 8-10% growth; the NASSCOM guidance for the sector is 11-14%. I have never known a time when Infosys is saying it will grow at a significant lower pace compared to the industry. Why did you have to guide so moderately?

Shibulal: As you can see, we have been through a difficult quarter. We have seen unprecedented convergence of multiple events during the quarter. We saw contract delays, delays in some of the anticipated ramp-ups which we had planned and ramp downs in quite a few accounts, especially in financial services and in the US.

Most of it actually happened during the end of the quarter. When we ended the quarter, we had visibility for about 95% of our business and during the quarter we catch up. But when these kinds of events happen during the end of the quarter, especially in a converged fashion, it is a difficult quarter for us and you can see what happened in this quarter.

We are in a new normal, we are operating in a pretty volatile environment. It’s actually a very bold thing to do to stand at the beginning of the quarter and make guidance. In the beginning of the year, our visibility for the entire year is only 65% and beginning of the quarter it is 95%. So to actually give guidance in this new normal, where there is global volatility and lack of client confidence is bold.

While we are seeing that the budgets are closed and actually are marginally down, the visibility in the spending, the confidence of spending by clients is actually quite low. In financial services, what we are seeing is a zero base budget, which is month to month, so to actually give a guidance in such a complex environment itself is a pretty bold statement to make.

Q: Why did you have to give guidance? Did you think that 8-10%, which is lower than the sector guidance, would be better off than not giving guidance at all? That was an option, you said it’s too uncertain, I will not guide.

Shibulal: We have always said that our guidance is statement of facts, it reflects our reality, our client base, our opportunities that are in the pipeline. We always see that statement of facts, whether it is a difficult situation or a good situation, we have a statement of facts and we should make that statement.

So our guidance, even in this year, is a statement of facts as we see it on our reality at this point in time.

Q: This point that you are making about March seeing the biggest slip down is sitting at odds with what the other IT companies are saying which is that March is when the ramp up began. Can you explain what exactly the problem is with the nature of these ramp downs and whether it’s just an existing client problem or it’s also a new client problem?

Shibulal: As I said, we have seen ramp down during the quarter especially in the financial services segment in North America. We have also seen some leadership changes in couple of accounts. While we were entering the quarter, there was no sign of ramp downs. Suddenly we are seeing the confidence in the global economy come down, but at the end of the day it is our clients who determine our fate and our reality.

It’s a reflection of what we are doing in the market also. Our dependency on the discretionary spend is comparatively higher. For example, our consulting and system integration revenue is approximately 30% plus which means our dependency on the discretionary spends is higher. Our average life span of the discretionary spend is about three-four quarter and every quarter you have to review.

Q: On this ramp down issue, is it something that you see going into the sector because your Q1 guidance also is zero to one percent which is extremely poor? So is this a lingering problem for you going into the new year?

Shibulal: Our Q1 guidance is as we see it at this point in time because we have just come through a difficult quarter; we have just come through a quarter where multiple things happened during the end of the quarter. So we entered that phase almost a month back, so we have to look at the reality as it is today and our Q1 guidance reflects what we see today.

At the same time, I want to point out that there are many positives which we see in this environment. We have added 52 new clients, which is one of the highest client additions. Out of them, six are Fortune 500 in US and four are Fortune 500 Global. Our price increase is also something to think about, because in a difficult year our pricing has gone up by 4.7% year on year which shows our focus on quality of growth. So we are continuing to focus on quality revenue and the pricing increase which we have seen through a difficult in this environment reflects it.

Our model is also changing which is also equally important. For example, our revenue from products and platform this quarter is 6.2%. Our platform revenue in Q4 FY12 is USD 25 million but we are executing the year with a total contract value of USD 350 million.

So our strategies which we have put in place, which is being relevant to the client in the transformational operation and their renovation agenda, to strengthen our strategic partnership with our clients, to make sure that we evolve our business model into new model where you have dependence on various parts of the client business. All of those are playing out very well and that gives me confidence that in the long term our strategies will be in favour of our performance.

Q: It’s not just 8-10% revenue guidance but also the 4-6% EPS guidance which is hurting investor sentiment and also the fact that you are guiding for a 9% drop in EPS in the Q1. What kind of margin compressions are you staring ahead, both for Q1 and for the full year and why?

Balakrishnan: There are multiple things. We give guidance because we don’t want any asymmetry of information between the management and the investors. When we look upon our customer base, when you look at the budgets, we have a view on what the IT budgets are and in the last few years we had a view on how they will spend that too. Today we are living in a new normal world where you don’t have visibility on the spending but you have visibility on the budgets. Last year in the beginning we gave a guidance of 18-20% and we revised it down to 17-19% because of currency movements. Then we brought it down to 16.3% and finally we delivered 15.8%, so we are living in a new normal world.

I was reading a story in Financial Times that said out of the S&P 500 companies 1/3rd of them use to give guidance for full year but now it has come down to 1/5th. So the ability of a company to predict for the long-term has come down. But what we believe is we have a set of customers, we have a long-term relationship with them, we have a greater visibility on the budget so we have a view on the spending. The spending could be volatile, so we have a data today we want to share with the investors that’s why we give guidance.

We have given 8-10% growth in revenues. The EPS compression is because we normally say our operating margin could decline by 50-100 bps in a year, it could go up or it could come down. Even last year, our operating margin declined only by 0.7% so we managed that well because we have lot of levers on our side. First quarter, especially the operating margins, could come down by around 200 bps mainly because the visa cost gets bunched up in the first quarter because we have to apply for visas. Also, in the last two years we have been hiring locals in US; we have hired some 1,200 people each year in the US and even this year we plan to hire another 1,200 people which could get bunched up in the first quarter. At the end of the day we have to invest in all the global markets where we operate, we have to create jobs there and that’s what we are doing and that could have an impact on operating margins too.

So these two things could impact the operating margins by around 200 bps and if you look at the non-operating income we had a substantial forex gain in the Q4 which will not be there in the Q1. If you put this two together, the net income level probably you can see at 300 bps compression. But if you take a full year, we believe that we can get back operating margins and it could be within our normal band of 50-100 bps.

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