Nasscom sticks to double-digit growth forecast for IT sector

Amid the short-term quarter-to-quarter pressures of delivering operating margins on a consistent basis, CEO's must also define strategies and deliver on long-term growth or face disruption from non-traditional competitors.Speaking to CNBC-TV18, R Chandrashekhar, President, Nasscom, says the organisation sticks to double-digit growth forecast and sees IT sector growth at 12.3 percent in constant currency terms.Meanwhile, Pravin Rao, COO, Infosys, says it will bid for government contracts very selectively. Furthermore, he is of the view that there has been a gradual improvement in the overall business environment. In the same interview CNBC-TV18's Shereen Bhan also spoke to Noushir Kaka and Jim McKelvey. Below is the verbatim transcript of that interview Q: You can’t say cautiously optimistic about the outlook as far as the IT sector is concerned. You have been forced to cut your guidance for the outlook as far as the IT sector is concerned. How bad are things looking at this point in time? Are we likely to see a downward revision?Chandrashekhar: We have just made the projections so it is way –way too early to even talk about a downwards revision. Let me put it in a certain perspective. If you look at the current year’s performance where right through the year the question was asked are you revising it and we said we don’t see any real reason to revise it. At the end of the year we are now seeing that we are likely to end up with around 12.3 percent as the growth rate in constant currency terms. We had said our projections were in constant currency terms which some people did not quite notice at that point. If you look at what this translates into in actual reported US dollar currency it is a 10.3 percent growth rate. For this year we have projected a 10-12 percent growth rate again in constant currency terms. However, when you make a projection there is no difference between constant currency and reported currency because at that point you are not estimating that there is going to be a big difference. So, in a sense what we are projecting therefore has to be seen as continued double digit growth hovering around the 11 percent range which is what the long-term projection was over the next five years when the NASSCOM McKinsey Perspective 2025 Report was brought out. So, the net effect of all of this is that we seem to be well on our track to get to the USD 225 billion mark by 2020 and USD 350 by 2025. By saying that everything is hunky-dory and it is all going to be smooth more certainly not. There are lots and lots of issues but this is an average aggregated across all of these issues and all these problems and all the companies.Those details will come out again. Q: What would you articulate as being the single biggest risk factor today to this projection?Chandrashekhar: I would say that the single biggest challenge would be the ability to build the skills as quickly as we need to and to make the transition between the traditional business and the new areas of business very closely linked to the mix of the market that you are addressing. Q: We have been talking about this greater differentiation between companies for several years now. We perhaps started to see it happen. Just to extend the point that R Chandrashekhar was making what would you articulate as being the key challenges or the key risk today?Kaka: Starting off as you said we have been doing this for a long time so I go back a lit bit I think there is not a moment in time that I can remember in the last 16-17 years when I felt more excited and I felt more terrified at the same time. It is actually a funny feeling because you are sitting there and saying should I be optimistic? Sometimes you think yes should I be pessimistic, sometimes you feel no.What is the greatest challenge you said, one is there is without a doubt when we saw, even in October when we came out with a NASSCOM McKinsey Report we said that the legacy business that we are actually focused on is under severe contraction. We forecast that almost 15-25 percent of that spent bucket is actually going to be not there in four to five years time. We are been proven wrong on both the 15-25 and the four to five years. It is happening faster, probably more than that. So, one side we are seeing a dramatic contraction and what we would call our traditional services and at the same time we are seeing this dramatic uplift in so called new additional services as you said which is our four categories of the this SMAC stack plus Internet of Things (IoT) plus cyber security.Now whether the two actually balance each other out, because this is obviously 70-80 percent of the industry balances out with the 10-20 percent lift that you are getting from digital. Right now you are seeing a lot of players playing that two horses. You are going to see that playing through and which is why the growth rates are going to be more disparate because companies that move from one system to the next faster are just going to capitalise on that growth. Q: How much pain do we see in the interim as people try and move up so to speak to the newer technologies?Kaka: You are going to see lot of change. Some of it will be painful and some of it will be exciting. So, let me paint what it takes to be successful in the new world is quite different from what it took in the old world. For example, your sales and marketing expenses are going to go through the roof.Q: So, more margin contraction?Kaka: Not necessarily, because your pricing is also going to go up for the new services. However, your people model is going to change. You are no longer going to have as great a pyramid as you used to probably it is going to be closer to the customer as well. Probably you are going to invest more on research and development (R&D).So, you are going to start seeing the character and the change of these companies and you probably going to start solving problems for different people as well. You are no longer going to be only confined to one part of the company. So, you are pretty much building at least two companies if not three companies at the same time.(Interview transcribed by Binu Panicker, Swapnil Deshpande and Vrushali)