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Nandan Nilekani on Infosys' future

Nandan Nilekani
CEO, Infosys
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January 11, 2007

The much-awaited Infosys' results are out. The company's Q3 net profit is at Rs 983 crore versus Rs 929 crore (QoQ) and revenues are at Rs 3,655 crore versus Rs 3,451 crore (QoQ). The numbers are in line with market expectations.

Looking at the numbers from the management's perspective, CEO of Infosys, Nandan Nilekani, says operating profit margin has gone up by 20 bps due to SG&A (Sales, General and Administration) benefits. But rupee appreciation of 3.8 per cent has caused Rs 145 crore (Rs 1.45 billion) loss in revenue, he adds.

Infosys has seen 0.2 per cent increase in attrition, excluding involuntary attrition. The company is also seeing new customers entering at higher price points, he says.

So Nilekani is satisfied with the way the year has panned out for the company so far. Also, considering rupee appreciation and lesser number of working days, it was good quarter, he says.

Going forward, he says the company will grow 43 per cent in dollar terms and 46 per cent in rupee terms.

Excerpts from CNBC-TV18's exclusive interview with Nandan Nilekani:

It's been a quieter quarter compared to Q1 and Q2, but there are good reasons for it?

I think it's been a good quarter; we have grown at 10.1 per cent in dollar terms making it the third quarter in a row where we have grown in double digits. Of course, in rupee terms we have grown only 5.9 per cent, but that's because on an average, the rupee has appreciated at about 3.8% for the year. And because of rupee, we lost about Rs 145 crore of revenue.

And on the operating margin side, in spite of 200 bps impact on operating margin, it has gone up by 20 bps because we gain on revenue productivity, package sales and SG&A (Selling, General and Administrative Expenses) scale benefits. Plus it was a quarter when there were many holidays. So when you look at the totality of it, I think it was a quarter that we are quite happy with.

You haven't changed your guidance too much for the full year, whereas in the last couple of quarters you have upped your guidance quite significantly. Should one read anything into it?

I don't think so. It is the first quarter in the US, where people are doing the Budget and so forth, but fundamentally, if you take an annual look, we are talking about growing at 43 per cent in dollar terms and 46 per cent in rupee terms. So we are very much on target and don't see any global slowdown as such. We think we have a strong position and our strategy of moving up the value chain is working out well. So we have nothing to complain about.

Last couple of quarters you saw volume growth of close to 14-15%. Despite the holidays, is there any sign that the volume growth momentum is slowing down or is it just a quarterly aberration or expected quarterly aberration?

I think it is more of a quarterly factor. When you are growing at 10 per cent a year for three quarters in a row, it means each quarter you are adding that much more to the volumes. It is all based on previous quarter's ending mark. We are very happy with the way the year has turned out.

Aside from the volume growth, the market seems to understand what's happening with pricing trends. Are you seeing an uptick or are you seeing just stabilization at this point?

I think it's the same; stable with an upward bias. Some of that has been reflected in the improvement in the revenue productivity, which V Balakrishnan talked about. So there is nothing different to report apart from what we have been saying earlier.

Of course in the US, you are entering a new year and the year has just started. What are the initial signs that you are getting for this calendar in the US in terms of IT spending, IT budgets? Do you think there is any let-up in the volume momentum that you have seen in this calendar year?

At this point, we do not see an overall slowdown, that's point number one. Point number two is that we do not think IT spending is going to go down dramatically, it will be a few percentage points, but more importantly with the global sourcing story becoming main stream, I think increasingly more and more clients across the world are looking at this as a big way to do it.

I also think the risk perception is going down in the sense that earlier companies who were willing to have just 1,000 people working for them in India, are now willing to have 10,000 working force in India across their own captive or across partners. So I think the risk perception has gone down. So all these bode well for our business and Infosys in particular being right brand at the right place, we will be able to benefit from that.

Your press release says that Europe has performed very well as a market. So tactically, are you looking at a change in terms of the geographical spread?

We have been saying this for sometime that we want to improve our geographical spread. Basically, if you want to buffet yourself against changing economic trends globally, then you need to have a diversified geographic portfolio. So what is happening in Europe is very much a part of that.

The standout order for this quarter is Tech Mahindra's billion dollars. How does a company like yours, who has leadership status in the industry look at a USD 1 billion relationship, which goes to some other vendor?

First of all, we think that the market is very large. Even now, the Indian technology industry has relatively a small part of the global market. There is room for everybody to grow, so everybody is happy.

Are you saying that you would give your right arm for such an order because it is really a large relationship even by your standards?

Given our strategy, we are comfortable with what we are doing.

Is it getting easier for a company like yours to get a foothold into those big one-shot deals?

Definitely, we are called more and more at the head table for conversations. We are more and more seen as an equal partner in all these relationships. There are many cases, where our clients, after having made a large commitment to one of the legacy players, are now coming to us and saying help us out because things are in a mess.

Everyday and every week our position in the market is getting stronger and that is the trend, which we have been working on for several years.

There has been some talk from the Finance Minister that maybe tax exemptions need to be phased out for corporate India in this Budget. Does that have any kind of potential ramifications for you for, IT sector as such you think?

I think if we are already getting a tax benefit being in a software technology park with certain tax holiday, then I am assuming that it won't impact because such things will usually be prospective decisions. But having said that, Infosys' point of view on this is very clear; we support the move for reducing exemptions and lowering tax rates. In other words, we support much more simple system with less exemptions and lower rates. We are absolutely supporting such a move from the government for the software sector.

Do you have a three-four year plan on how to deal with exemptions because you have taken a step in the SEZ direction as well? How have you planned out your tax commitments depending on the government policy for the next year?

First of all, the existing business is essentially in software technology parks. These software technology parks have been set up at different points in time, so every year some of them are coming out of the tax exemption situation.

Now in 2009, the STP programme is supposed to end, but there are some conversations happening about extending that. Some of our new locations are all in SEZs, but at the end of the day, we should focus on our business. If the State expects us to pay taxes, we should pay that and don't have any problem with that.

We have to focus on improving our quality, productivity, value and our brands. Similarly, even the rupee is going to appreciate and that is a reality. That is not in our control. What is in our control is in our business, making our clients happier and improving the quality of what we do. So generally, we tend to focus on activities on which we have a zone of influence.

Has the groundwork started for the 2008 guidance because you have got into January and are a couple of months down the line?

Absolutely, but we are not going to tell you that today. We have a strategic planning process, which begins in October and it's a fairly elaborate 360-degree process. We just had our Annual Strategy Conference in Mysore last week and have one with an external board tomorrow. So the strategic process is all happening. We also have to look at how the next three months pan out before we can put our stamp on the guidance for April.

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