Growth to be focus, not margins: Infosys CEO Shibulal

Analysts and investors may be have been disappointed by flat operating margins despite strong revenue growth during the second quarter. But the Infosys management has made it clear that sustaining revenue growth will be its primary focus and margins, secondary.

Speaking to CNBC-TV18, Infosys CEO and Managing Director S D Shibulal said growth in the September quarter was broad-based and that net client addition was among the highest in the company’s history. The company added 37 clients during the quarter, five of which are Fortune 500 companies. Shibulal said that the next couple of quarters would be about investing in the business to take it to the next orbit of growth. But he also cautioned that the measures being taken by the company would take a while to translate into growth. And margins would not be the first priority at least for the next couple of quarters. Shibulal said pricing has marginally improved and that he expected it to be stable in the coming quarters. He said the business environment has seen a pick-up in the last couple of quarters, though discretionary spending has been volatile all through the September quarter. Shibulal said the company was facing challenging in the retail vertical, which was hurting from the downturn in US consumer spend. V Balakrishnan, head of Infosys BPO and chairman of recently acquired  Lodestone said there was no need for a special dividend at this stage. Rising cash levels in the company’s books had raised hopes that the company would reward shareholders with a special dividend. Balakrishnan said the board believes in rewarding shareholders at the right time. Also, given the volatile global environment, the company needed to preserve cash, he said. When asked about the high attrition of senior leaders in recent months, Shibulal said the company had a strong pool of talent, and that recent exits would not have any impact. Boardroom transcript page 2 onwards _PAGEBREAK_ Below is the verbatim transcript of the boardroom on CNBC-TV18 Q: Could you tell us on the back of what you saw in Q1 and on the back of what you have said in Q2 which has surprised the street on the positive side, is the mojo really back for Infosys? Shibulal: Q2 has been fairly good for us, growth has been all around. We have grown 4.2 percent in constant currency terms; we grew 3.1 percent in volume and most of that offshore, 4.2 percent offshore volume growth and we also had client additions. We have added 68 new clients and 37 net additional clients which is one of the highest over the quarters for us. We have closed five-six large deals. Our large deals are mostly USD 50 million and above and it will get realised over the next three-five years. Our top 25 accounts have grown by 3.3 percent and non-top 25 have also grown by 3.4 percent or so. Q: I know you have said that your guidance is a statement of fact - that traditionally the next two quarters are seasonally weak quarters for you, you are also seeing weakness as far as your retail business is concerned on account of the US government shutdown and holidays but even if you were to do flat, to even a marginal decline over the next two quarters, you should be able to do 10 percent, so why have you been so cautious? Shibulal: Our guidance is 9-10 percent, which in constant currency terms it is 9.9-10.9 percent. Apart from whatever you just said, we are also doing a lot of things, we are doing a lot of changes internally to make sure that we achieve our aspirational superior financial growth, which is higher growth and higher margins but these things take time to realise. They cannot be done overnight, there are no silver bullets and there are changes being made which will take time to realise and because of that we need to remain cautious. Q: Is Infosys now aligning itself to the Nasscom growth average of 12-14 percent? You now have enough visibility as far as the next two quarters are concerned - So are we likely to see an upwards revision, are you going to follow your tradition of under promising and over-delivery? Shibulal: We have considered the visibility in creating the guidance and our guidance is a statement of fact. We are doing number of things and these things take time to give results. We are very focused on creating superior financial performance but it cannot be done overnight and we need to remain cautious. That is why we have given a guidance of 9-10 percent. It is a statement of fact as we see it today. In constant currency terms it is 9.9-10.9 percent. Q: The one criticism that people have as far as the margins are concerned - is this a bottom as far as the margins because you have taken the impact of the wage hike which has offset the rupee depreciation benefits, rupee depreciation of about 11 percent this quarter, can we expect a margin expansion from hereon? Bansal: If you were to look at what we have been saying consistently over the last many quarters - there are a lot of areas that we need to work on to get back the momentum that we have been lagging behind the industry growth or the competition, and that requires us to make a lot of investments, be it employees, be it our sales engine, be it in quality and productivity, be it in tools, products. I would say that as long as the rupee remains stable, I think the margin plus-minus one percent … Q: What is the definition of stable because today we are at a high for the rupee at 61.19/USD? Bansal: If it remains stable, you can to some extent have an effective hedging strategy to negate the impact of the volatility in rupee. At whatever levels it remains, it should be stable and not move 2-3 percent on day-to-day basis because then is very difficult to manage. So, the next couple of quarters - we have to look at it as investment quarters, we have to get our growth engine running, we have to get our momentum back, we have to make the right investments and margins will automatically flow subsequently. Q: Over the next two quarters, you don’t see margins expanding; you expect the margin picture to remain flat which is what it has been over Q1 and Q2? Bansal: I would primarily focus on growth; to get the growth back, momentum back, investments. I think the primary focus has to be to get the growth momentum and make the right investments, and if we do that the margins will get automatically flow. So, I am not worried about this quarter or the next quarter. The whole idea is to create a growth engine which will sustain high margins. It is not about current quarter or the next quarter. Q: How much more can you squeeze by way of higher utilisation rates which have gone up considerably for you in this quarter as well as the cost rationalisation exercise that you have decided to undertake? Bansal: The cost rationalisation exercise actually will give benefits in the subsequent quarters because we have started on the journey, a lot of changes were being done but the benefit will come in subsequent quarters. On the utilisation front the utilisation excluding trainees is still at 77.5 percent, it is still very low. Q: Your own target was 80 percent by when do you hope to be able to touch that? Bansal: Our net addition is only about 1200 employees during the quarter for Infosys. So if you look at the last few quarters, our net addition has come down so that is the reason our utilisations are going up but a lot of it will depend on the growth. If we see good growth the utilisation automatically go up. We will automatically see the benefits from the margins. Right now as a CFO, I am focused on making the right investment. I want to create an engine which will sustain high growth and good margins over the long-term, not just for this quarter or the next quarter. Q: The question now is on the sustainability of what you have been able to deliver in Q1 and Q2. In the light of what is happening in the US, what is happening in the rest of the world, what is happening as far as the currency is concerned how sustainable is the picture looking to you? This turnaround that we have seen in Q1 and specifically in Q2, how sustainable is the earnings recovery? Shibulal: Generally, the environment has got little better over the last two quarters. We have seen some momentum in financial services which is our largest segment. There were spends in regulatory requirements and compliance areas but now we have seen some spends in analytics, new products and services kind of area. So that is good for us. At the same time, I talked about retail where we are seeing some challenges. So, generally there is a momentum being built up - US has moved on, the GDP growth has improved for US. Europe is showing some signs of improvement, I think they will definitely help us. We have considered all of this into our guidance. _PAGEBREAK_ Q: I want to talk to you about your client additions because you have added about 68 clients this quarter, you have talked about 5-6 big clients in the USD 50-100 million but you have added only one client in the USD 70 million and none in the USD 100 million, can you give us some sense of the colour of the kind of client wins that you are getting? Shibulal: These are two different things; one these 67 are new client additions, which is a net addition of 37 new clients. The more important thing about client addition is kind of clients which we are adding - are you adding the Fortune 2000 that is very important. Out of this 37, five are US Fortune 500, which is a good number to look at. Our client base is Fortune 2000 but Fortune 500 is even better, five are Fortune 500. To talk about million dollar clients - the number of million dollar clients have gone up from 466 to 469 this quarter, and number of USD 50 million clients have gone up. There has been a minor aberration in the USD 80-70 million clients, which is not a material matter at all. Bansal: These are based on last twelve months (LTM) revenues. So, if you have a movement of half a million dollar here and there, you may see an increase or a decrease coming.  However, the thing is that if you look at the million dollar clients and the number of addition. How many clients are giving you on LTM basis a million dollar revenue and opportunity that you have to mine those clients more to grow them into USD 5-10 million, USD 20 million. If you look at the success of most of the IT companies is when how well you can mine your existing clients and grow them bigger. Q: But what about the transformational deal wins and what is the pipeline looking like as far as growth is concerned? Shibulal: I would add to what Rajeev Bansal just said, our topline grew by 3.3 percent, our top five grew by another 3.7 percent. So, our toplines have grown pretty well this quarter. Our transformational deals are also progressing, our consulting in system integration revenue has gone up from 28 to something like 33.3 percent his quarter including Lodestone. The Loadstone integration is complete. So, we are able to pursue transformational opportunities in US. However, one must remember that transformational programmes are in the discretionary spend space and discretionary spend continues to be volatile in this environment. While there has been some positive movement in the economy but as long as the economy doesn’t stabilise, you will have volatility in the discretionary spend. Q: You talked about pricing and you said pricing is stable at this point in time. What is the anticipation in terms of pricing and what are clients telling you because I would imagine they are going to try and milk whatever benefits that you are getting as far as the rupee depreciation is concerned. Shibulal: Generally, rupee deprecation do not come into the pricing negotiation because their budgets are in their local currency. By doing this they would eventually link it to the currency movements of the Indian currency and then we will also have a right to go back and renegotiate when the currency moves. Moreover, if you look at the pricing environment today and for us, it has remained stable now, it has actually marginally gone up. It has gone up by 0.6 percent. I expect the pricing to be somewhat stable for the coming quarters but there are two parts to it. The large outsourcing deals are very price sensitive and we are wining more and more of those deals. Large outsourcing deals are in the business and IT operations space, where it is sometimes hard to differentiate. It is a more commoditised space, they come with much higher pricing pressure. So we need to manage it, we need to manage the portfolio together to make sure that our margins are sustainable. Q: There was buzz in the market in the morning on the possibility of a special dividend; you have announced an interim dividend of Rs 20 which is higher than what was being expected by the street but any considerations of a special dividend at this point in time? Bansal: We have always believed in giving the money back to the shareholders when we feel that we have excess cash on our balance sheet. Q: Isn’t USD 4 billion excess cash? Bansal: USD 4 billion is a good amount of cash but I won't say it is excess cash. The whole industry is going through a churn - you have this overhang of immigration bill in US, outplacement clause etc so the fact is that you have to keep this cash, it is strategic in nature. Q: So you are dashing hopes of the possibility ofa special dividend next time around? Bansal: Honestly speaking, I don't see why a special dividend at this point in time because the Rs 20 that is 400 percent announcement of dividend is a good dividend and we need this cash in the balance sheet to help us go through this journey. Q: We have had our Moneycontrol boarders also sending us questions and one of the questions is on the management churn that we have seen. We have seen two-three exits, you both have seen several other exits take place in this quarter, is the transition over and done with, what is leading to these exits from Infosys at this point in time because that seems to be a concern? Shibulal: I think one needs to remember that this is a very large organisation. We have a very deep leadership pool, we have a leadership programme which was put in place 12 years back, in 2001 when we started our leadership journey. Q: I understand the fact that you have a pipeline of leaders but I am trying to ask you why we are seeing Infosys lose so many top leaders at one time? Shibulal: We have not lost so many top leaders. Q: You have lost Basab Pradhan, Ashok Vemuri who was giving iGate numbers last night, why? Shibulal: If you look at tier-I, tier-II and tier-III leadership that is about 550 people. So going back to what I was saying, we have very large leadership pool in place. We have a very deep leadership skill in place. People do move on, these are high performers with high aspirations and they may want to do different things in life. So that is part of life. The important thing is, is the organisation able to transition? We have Sanjay Jalona who has taken over from Ashok Vemuri, the transition is complete. It is also important to note that we manage relationships in a broader sense. Our client relationships are at multilevel. Q: But clients must have expressed concerns and apprehensions about this? Shibulal: Our clients have multilevel relationship; it is not a single relationship. We understand that people will take up new responsibilities. So when people take up new responsibilities, the client cannot be concerned, and so we have to make sure that we have multilevel relationship. I will have a relationship, Gopalakrishnan will have a relationship, and the next level will have a relationship. Hence, we always look at it from a sustainable relationship model and that is how we address clients’ concerns. _PAGEBREAK_ Q: I understand that institutional investors had raised concerns about Rohan Murthy’s evolution, elevation within the company, have those concerns been addressed now and what role is Rohan Murthy going to be playing? Shibulal: Rohan will join in as Narayan Murthy’s executive assistant. Narayan Murthy had clearly articulated what his role is going to be and he is performing that role. Q: But this has been a concern raised by institutional investors has it not? Shibulal: There have been queries and we have responded to those queries. Q: Acquisitions - we have talked about this for several quarters, now you are sitting on USD 4 billion, you are hoping to rave up the growth engine, is acquisition going to be a big part to the strategy to do that? Shibulal: It will always be; we did the Lodestone acquisition two quarters back and we have done the integration, it takes time to integrate. Service industry acquisitions are not easy to integrate because these are people integrations. People have to come together and work together to make sure that two plus two actually delivers five and that can be sometimes challenging. In the case of Lodestone we have done the integration. Acquisitions will continue to be strategic for us, we will look at the areas which will make differentiation to our clients. Q: Anything on the radar at this point in time? Shibulal: There are multiple things on the radar but I cannot tell you. Q: Are you being able to sleep easier today on the back of what you saw in Q1, what you have been able to deliver in Q2? In terms of the environment, in terms of the visibility are you being able to sleep a bit easier now? And you know the comparisons, the valuation difference between Tata Consultancy Services (TCS), HCL and Infosys, how are you reading the competitive landscape as well at this point in time? Shibulal:  Here, I will go with NRN Murthy’s view that clear conscience is the softest pillow one can get. As long as the organisation is moving in the right direction, as long as we are doing things legally and ethically, as long as we are focused on performance, as long as we are focused on our clients, our solutions, our people – there will see short-term challenges but as long as we are focused on making sure the organiation is on the right path, I sleep easily. Q: Is there possibility of an upward revision the next time we have this conversation? Shibulal: As I said, the guidance is a statement of fact and if the facts change, the guidance will change. Q: The one-time hit as far as the visa related expenses are concerned, a cost that you have actually taken on the administrative line of about USD 35 million? Explain to us what this is about and are we likely to see this recur in the forthcoming quarters? Balakrishnan: We are in discussion with US attorney office and some of the other regulators relating to our Form I-9 and past use of B1 visas. Based on our discussions till now we have made a provision of USD 35 million. The discussions are ongoing. Q: So these are the discussions with the Department of Justice (DOJ), is it? Balakrishnan: Yes. The discussions are ongoing. It will get concluded at some point of time, we do not know when. In anticipation of that we made a provision of USD 35 million. Q: So we are unlikely to see something like this happen in the next quarter as well or any other hit on account of visa related expenses? Balakrishnan: We will come to know once discussions are concluded. It is too premature to talk about it. Q: Shibulal was talking about one vertical where you are clearly worried about and that is on the retail side. You have seen good growth coming in as far as manufacturing is concerned. Take us through what you actually expect in terms of the vertical growth especially as far as manufacturing and Banking, Financial Services and Insurance (BFSI) is concerned? Srinivas: If you look at the two verticals again the macroeconomic situation for both the sectors are relatively stable. Particularly if you look at financial services, both in the US, Europe and also in other parts of the world including Australia. We are seeing the banking and capital markets turn for the better in terms of their outlook, while there is still a lot of cost pressures and hence there are lot of cost optimisation initiatives, which we are participating. We have also seen discretionary spend marginally climb in the last quarter both in US as well as in the Europe. Interestingly we are seeing more of that activity in the Europe as compared to US. _PAGEBREAK_ Q: So Europe is actually rebounding at a faster pace? Srinivas: Relatively yes. That is also a reflection in our own revenue growth rate, in financial services as compared to US, Europe has grown much faster. We only hope that the Q3-Q4 for the sector continues to be stable and in that context, there will continue to be deal activity and deal momentum. We have had good large deal wins, particularly again in Europe as well as in US, three in financial services sector. Australia is doing very well for us, we work with some of the top banks there and there angina there has been a fair degree of vendor consolidation efforts, where we have participated and we have won some deals. Overall, the sector definitely looks to be relatively positive as compared to the last year. Q: The impact of the US government shutdown now and we do not know how long it is going to last, we do anticipate that there is likely to be a breakthrough and of course last night there was a sort of short-term breakthrough as far as the debt ceiling crisis is concerned. What is the visibility as far as America is concerned, especially if you see a protracted political collision between the Democrats and the Republicans? Srinivas: We hope that there will be a conclusion soon. For now, we have not seen any break in the momentum, but one can never say, in case there is no convergence on ideas between both the parties and there is no solution, we just hope that is not the case. As far as our discussions with the clients are concerned nobody has taken any major action in terms of any business activity shutdown, so for now business is as usual. Q: As far as the new clients are concerned and you said discretionary spending is going up are you feeling that you will be able to crank up as far as pricing is concerned as well? Srinivas: It is too early to talk about pricing uptick. Like I mentioned, across sectors there is still a lot of focus on cost optimisation and hence the pricing environment in the very short-term may not see a significant momentum upside. The discretionary spend when I mentioned is also in pockets it is not happening on a broad base.  The budgets have already been cast in the beginning of the year, so there is no recast of the budgets and so we will get to know when the new budgets are cast for the next year and then we will be able to predict much more on whether there is a real big uptick in discretionary spend. Q: Do you anticipate a stronger FY15? Srinivas: If the macro continues to be stable then there is a possibility of a stronger FY15. Q: Let me talk to you about the possibility of headwinds now, of course this overhang of what is likely to happen as far as the US immigration bill is concerned, is one of the big ones - there seems to be some degree of relief coming in that some of the negative anti-India or anti-outsourcing clauses will perhaps be diluted, what is your own sense as far as the immigration issue is concerned? Balakrishnan: I think US is ultimate capitalistic country. That is always the hope and I believe they will do what is right for their country and immigration is one of the top most agenda for them. They have to attract the people to come and work for their country otherwise you cannot sustain the productivity and the growth in that economy. Some are political, some are necessary because of the state of the economy. Ultimately, they will find a right solution in the middle, which will help both the countries because there is a lot of political pressure from India too, to get it right for the industry and there is a lot of noise in the US to dilute some of the things. Q: Are you hopeful that as far as the outplacement clause for instance is concerned, we are likely to see a dilution which will favour outsourcing companies specifically in India? Balakrishnan: I think so because the noise levels on both sides are there because there is noise level not to dilute, there is noise level to dilute. That is why I am saying; ultimately they will come to a right conclusion which will benefit both the countries. Q: Given what is happening in Washington at this point in time, do you believe that we are likely to see a conclusion perhaps in the first half of next year or do you believe that it is going to be a protracted one? Balakrishnan: Right now, they are solving the debt issue and the budget issue and that is on top of their mind. They have to overcome that then focus on the next one and that will be immigration. I don’t think that the immigration bill will be taken up in the next two-three months till they solve the budget and debt issue. Q: That is one of the headwinds, what could be the other headwinds or the challenges that you could be faced with in the next two quarters? Srinivas: Typically, we look at Q3 which is a soft quarter. The number of working days is less and of course there are holidays. Also as I mentioned earlier, as the Q3 results for our clients are announced, they will then decide whether they would invoke furloughd typically which happens in their last quarter. So those are some of the challenges we could face but it is too early to anticipate. Q: How concerned are you about that? Do you continue to maintain that it is on account of the holidays and furloughs that you haven’t been able to spell out a higher guidance than 10 percent? Srinivas: These are things which if we could predict, we would have factored that in. To the extent we know, we have factored it in. Q: So it is a statement of fact that you are once again repeating to me? Srinivas: There is only so much we can predict. I wish we had a crystal ball where we could see what is going to happen in the next three months. However, if you look at Q4, it is typically a budgeting year for all our clients. If things continue to be stable, the budget situation looks much better then we could obviously give a better guidance when we hit Q4. For now, that is why we are being cautious given these two factors. Q: Let me ask about the succession plan now because we have talked about extensively about the transition that is on, Shibulal’s term expires in 2015, what goes on from hereon as far as succession is concerned? Balakrishnan: You are talking about one and a half years down the line. It is too early to talk about succession now. We have a nomination committee; there are some internal candidates, which they have already identified. So the process will go on. We have time; a lot of things can happen in the next one and a half years. Q: I don’t want to put you on a spot but I have to, are you one of the internal candidates on the list? Balakrishnan: That is what media is speculating.