Infosys is not facing any major pricing pressure and pricing environment looks stable at the moment, President BG Srinivas said. “Because the macro environment is stabilised, we see clients taking decisions both on distribution spends as well as on the basics of running the business,” he told CNBC-TV18 in an interview after the IT major announced its Q3 earnings.
Infosys’ Q3 net exceeded street estimates as its profit rose 19 percent at Rs 2,875 crore. However, its gains were tempered due to sub par dollar revenue growth. The company raised its full year FY14 dollar revenue guidance to 11.5 to 12 percent from 9-10 percent earlier, which was largely in-line with analysts' expectations.
Srinivas, who has been recently elevated as the president of India’s largest IT services exporter, added that the company’s strong focus is on internal efficiencies and is trying to leverage efficiency factors to increase margins. He is hopeful of seeing expansion in the company’s margin if pricing remains stable.
Below is the edited transcript of BG Srinivas’ interview with CNBC-TV18
Q: What is the sort of pressures that you are actually seeing on pricing? How challenging is pricing? You have seen client addition. You have seen some big wins coming in as far as this particular quarter is concerned. How challenging is the pricing environment?
A: For the moment, the pricing environment looks to be stable. As the clients are laying out their IT budgets for the coming year again we see a greater degree of stability. For now, we are not seeing any major pricing pressure while definitely in the client context there is a lot of focus on cost of optimisation, but at the same time because the macro environment is stabilized, we see clients taking decisions both on distribution spends as well as on the basics of running the business.
Q: We have seen a major shift of your business from onsite to offshore and that has clearly shown up as far as your margin picture is concerned. Do you see more of this onsite-offshore mix changing? Also as far as margins are concerned how much more can we see you squeeze by way of cost optimisation, by way of utilisation? What can be the margin picture up until the end of next year?
A: This is a larger discussion in terms of what we are doing on the cost optimisation. It is not necessarily to do with one component offshore-onsite ratios. There are several initiatives and levers on which the margin hinges on. For example, while we can definitely shift the ratios in terms of offshore-onsite, there is also a focus on internal efficiencies, improving utilisation onsite, making sure that the individual roles are built for the specific tasks being carried out. There is also a lot of efficiency drive in terms of increased automation. In this context, what Infosys is trying to do is to leverage all the efficiency factors and help improve margins.
Q: You were talking about the three-pronged strategy that Infosys is employing at this point in time to shore up margins. How much more can we actually see margins improve by, because that is the one area where the street has been clearly positively surprised?
A: That is also in the context of what we would see in the marketplace. While our focus on improved margin efficiency will continue, it is also determined by the pricing environment. If the pricing environment continues to be stable, we could definitely see some margin expansion, but it is very difficult to determine at this point in time.
Remember, we are making investments back in business so that is something we will continue to do. We want to make sure that internally we drive margin improvement efficiencies, but in the marketplace we want to remain competitive. We will have to balance that. We will have to also balance the investment which will make the business. So it is very difficult to say what exactly will the margin expansions be because we need to look at all these three dimensions.
Q: What about the picture as far as the US is concerned? That seems to have been one of the worries as far as this particular quarter is concerned declining by about 0.8 percent QoQ. What is the outlook now as far as the US is concerned? Europe has grown by over 5 percent. Do you anticipate that to continue?
A: These are trends which need not be looked at specific to a quarter, but if you look at the full year, US market is definitely opening up and there is expansion in what is happening within US across sectors. Also typically Q3 which is our Q3 is the last quarter for our clients. In the US typically there is a focus on making sure that they manage their expenses within the budget, there have been some furloughs. I would just say that it is bit more quarterly. It is not a complete outlay for next year. We would continue to invest. It is largest market in the IT service area.
Q: Can you give us a sense of the outlook as far as client addition is concerned, specifically also in terms of the kind of contract sizes that you are actually seeing and how confident you are feeling about that?
A: Within Infosys as far as our sales strategy is concerned it is very clear that we have to focus on our current client list and we are continuing to expand across the services. We are seeing that result into movement of the client base from a certain level to the next level and that we are seeing movement from a USD 1 million client to USD 200 million client. At the same time, there is a very clear focus by sector and by geography in opening new clients. We have had some sizeable deal wins and hence you are seeing an uptick in new client additions and revenue growth.
_PAGEBREAK_
Q: What do you really anticipate in terms of volume growth in the context of the fact that you certainly seemed to be feeling a lot more confident and optimistic about the year ahead?
A: Compared to Q3, I would expect the volume to expand. In Q3 there are furloughs and leaves. Hence we will always see a softer quarter in Q3 as far as volume expansion is concerned. Even if the macro environment continues to be stable and the client's IT outlay continues to be as it is, we should definitely see a volume expansion.
Q: Can you give us a sense of by how much do you actually see volume expanding?
A: It is difficult to quantify that upfront. We are definitely seeing movement in terms of programs, deal wins, new client additions, but at this point in time it is very difficult to quantify the volume expansion. We have factored all of this into our guidance as we have increased the guidance for the quarter. So we will have to see through the quarter on a weekly basis how this plays out.
Q: What about sales and marketing expenses? We have actually seen that come off QoQ, but given the fact that you intend to be more aggressive in the marketplace what do you anticipate happening on that front?
A: For the next year, we already have plans for the full year in terms of increasing focus on investing into our markets. We are going to increase the total headcount within the sales community both in US, Europe as well as the emerging markets. We have the full year outlay. We are going to make investments and increase the overall headcount. We want to make sure we stay closer to our clients, focused on both the dimensions of expanding business within our client community as well as focus on new business opportunities and winning new accounts.
Q: I want to talk to you about your new role as president. Shibu in conversation with me said that you are along with Pravin Rao going to set up your own governance structure. Can you articulate for us what the intention is going to be? What the plan of action is? What you intend to do as far as this new governance structure is concerned and what your key mission is going to be?
A: This announcement has happened just a week ago, so we are in the planning process. Both Pravin and me have portfolio responsibilities, we have business segment heads reporting onto us for various verticals. It is not a major change at the next level because these leaders have been engaged and working on their specific responsibilities, so we will have business segments reporting it to us as we have already understood that I will have much more focus on the markets and Pravin will focus on the delivery operations.
In that context, we are in the process of setting up of next level governance. We have segment heads. In the markets we have the business unit heads and offshore we do have the delivery heads, in our consulting arm we have the delivery operations heads in the market. We are going to reconstruct the next level of governance. We are going to have platforms where some of the cross-learnings across verticals are established. We are going to have specific focus on service differentiation, specific focus on increased automation. These are some things which are evolving and we will definitely update as things fall in place.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
