'Top 100 companies should go global'

Q & A / T V Mohandas Pai

He was part of the team which piloted Infosys' listing on Nasdaq in 1999, the first by an Indian company on an American stock exchange. He is on important regulatory committees like the Accounting Standard Committee of the Securities and Exchange Board of India (Sebi) and the committee on e-commerce and taxation set up by the Central Board of Direct Taxes.

The Economic Intelligence Unit voted him as the best chief financial officer for 2001 in India.
Excerpts from his conversation with Subir Roy :

There is an unparalleled mood of optimism in the Indian corporate sector. As the CFO of one of India's most successful companies, what do you feel are the remaining constraints that are holding the economy back from going on to a higher growth path?
The constraints are all in the mind. Those like power and labour laws have all been overcome by corporations. The greatest boon now is the falling cost of capital.

For the first time in many decades, all the companies in the Nifty index have earned a return greater than the cost of capital. This has great benefits for India and for these companies. This has happened not only because of the falling cost of capital but also because of increasing competitiveness.

Will you give the regulator some credit for this?
The government has been proactive with its policies. The Reserve Bank of India has managed liquidity well so that there is no volatility at the short end of the money market. As a result, long-term rates are also down.

The next move should be to bring down repo rates so that the present largely-flat yield curve becomes a rising one. With the repo rate at 4.5 per cent and banks paying 3 per cent on savings bank deposits, a clear arbitrage window exists.

Banks can safely put monies into repos instead of lending. If the repo rate is lowered in tune with market conditions, banks will be forced to look at neglected sectors like small businesses for deploying their funds.

Should the regulator keep trying to help banks get healthier?
The health of banks has improved sufficiently and they should now be left to stand on their own feet. The Indian banking sector is now at par with the best in the world. They have become more technology-based, their non-performing assets are down and, what is important, the risk management ability of Indian banks is higher than what it was two years ago.

What will be the main engine of the new growth phase?

The top 100 Indian companies. They are second to none in emerging markets in management, governance, products, financial parameters and the ability to grow. Ten years of liberalisation has made Indian corporations competitive and outward-looking.

They are not just in IT and pharma but also in metals, auto, auto ancillaries and the financial sector. Competitiveness has also spread to textiles where new investment has led to a turnaround. These have to grow by 15 to 20 per cent a year, double in size in the next three to four years, so as to become of some consequence internationally.

What will be their particular strategy?
The domestic market is too small to meet their aspirations; they have to turn outward. They have to grow faster than the Indian economy and the local markets. For this they have to learn to survive in the global market over the next five years, by which time trade restrictions will be largely gone, so as to secure their future.

Japan, south-east Asia and China have all followed this outward-looking route to become globally competitive. To grow on this scale, the companies have to invest and create new jobs. This will increase domestic buying power and make 8 to 9 per cent growth feasible. This, in turn, will enable the market to grow fast enough to give them scale benefits locally too.

Where will affordable capital for this kind of investment and growth come from?
India's top 100 companies that wish to go global must internationalise their investor bases. In developing markets, growth is common. In developed markets, growth is at a premium. So, Indian companies can grow by going global. Overseas markets have a great appetite for risk and, therefore, you can raise large amounts of capital.

What will be the fallout of a good number of Indian companies raising capital in global markets?
More Indian paper being floated abroad will enhance recognition of the India brand. Once an issue is floated abroad, the need to interact with global institutional investors and keep them pleased will be a disciplining influence. Importantly, it will also create value.

Raising capital is one thing, particularly when you are the flavour of the season, servicing it is another.
These companies have products and services of high quality that are competitive. They have the capability to deliver across the globe. They have access to a global HR base and the chance to build brand image and recognition. To go truly global, they need to focus on four things: global products, ability for global delivery, multi-cultural human resources and accessing global markets.

Turning to software, there seems to be a global recovery in tech spending.
Reports indicate that global tech spending is showing signs of revival. Next year, growth is expected to be positive. Volume growth in software will continue to be strong. In the current year, the Indian industry estimates that it will grow at 30 per cent plus. Growth in this range for the whole sector is feasible.

But a cloud seems to be gathering over costs.
Costs will rise as a result of a ramp up in recruitment. But for Infosys, this will be according to plan and the costs have been factored into the guidance. The rupee will exert pressure and companies will need a hedging strategy. Rapid growth and commensurate hiring will make employee costs an area of concern.

Companies should have a strategy to sustain margins. There are no wage pressures at the entry level. These exist at the middle-level, among people with three to five years' experience.

Attrition is becoming an issue again.
Our attrition rate has risen to 9.1 per cent from 6 per cent a year earlier, but our performance is still good compared to the rest of the industry. Rising attrition is inevitable because the industry needs experienced people to sustain growth.

Margins can be sustained by growing volumes and optimising expenses. We have been doing this for the past two years and the same strategy should continue. A growing economy creates its own crises which have to be overcome.

There is volume growth but what is the outlook on prices?
Prices are beginning to stabilise and the larger companies are beginning to refuse contracts if prices go below the floor. Pricing power has not come back, companies are not able to again dictate prices; they have, however, become stable. Volume growth plus price stability will make Indian companies competitive even as they gain market share.

Global companies are opening their centres in India to match Indian costs.
One way in which Indian companies score is through control of their sales, general and administrative (SG&A) expenses. Yes, global companies are also acquiring offshore capabilities in order to cut down costs but still their costs remain comparatively high because their SG&A expenses remain high.

SG&A costs are lower for Indian software companies since their general management is based in India with the minimum-support staff based in the US. In onsite work also, the SG&A costs of global companies are higher because of higher per capita expenditure. The sales costs of Indian companies are also lower as they have marketing support from India with the client-facing teams based in the US.

The traditional weakness of Indian software companies is marketing. Will your recent internal reorganisation boost your marketing?
Infosys is transiting from being internally organised on the basis of geographies into business verticals. The north American practice has been reorganised into verticals so that the company can become more solution-led. Under the new setup there will be opportunities to build greater business domain expertise and penetrate customer accounts better.

The verticals will all be independent business units with profit-and-loss responsibility. This reorganisation is part of our long-term business strategy. Last year, retail, telecom and engineering services were converted into verticals and this was a good experience. This year, more verticals like financial services have been created.