After posting a 15.7 per cent growth in its net profit, Infosys gave a cautious outlook for the quarter ending September as well as for FY12. It said the macro-economic challenges continue to exist. In an interview to Bibhu Ranjan Misra and Pradeesh Chandran, CEO & MD S Gopalakrishnan shares the company’s strategy to tide over the short-term and long-term challenges. Edited excerpts:
Your margins seem to be on the decline since the beginning of the last financial year. How do you intend to take on the challenge?
At the beginning of the year, we had projected a dip in margin for the whole year by three per cent. It’s primarily because we had assumed growth rate of 18-20 per cent. We also said we would recruit ahead of demand. This affected utilisation. The currency also made an impact. Now we are projecting a 2.5 per cent drop in margin. If we achieve a growth rate of 20 per cent, you will see an improvement in margin.
Will Infosys ever go back to the phase when it enjoyed 30 per cent margin?
It is very much possible, because we have multiple levers such as services mix, revenue productivity, utilisation and price. In every quarter, you see slow uptick in revenue per employee. All these things actually help us to improve the margins. And, if growth comes back strongly, we believe we can achieve that.
Why has utilisation dropped below the industry average?
The lever for improving utilisation is growth. Otherwise, you may feel assured that we have no intention of letting our people go. The bench is something we are preparing for the future. We wanted to invest in growing a strategic bench, and it is happening.
Will it further impact margin?
This is a conscious decision we have taken knowing what is going to be its impact on the margin. We are confident that in the medium to long-term, growth will return and that’s why we are recruiting. This will allow us to train people properly and get them accustomed to the Infosys environment.
Why is client addition so low this quarter?
There are some deals which are being closed in the first week of next month. Sometimes, a decision is made at the end of a month, but may get postponed to the next month to close the deal. These are just quarterly aberrations. Otherwise, there is nothing to read between the lines.
Are you comfortable with four per cent volume growth in the last quarter?
The volume growth was almost zero just before two quarters. In that sense, this (first quarter volume growth) is a good pick-up. I am happy that growth has come back, but we will have to grow faster.
At the same time, you are saying the macro environment is still challenging?
If you look back, recovery started within a year of the downturn. But now there is concern of the recovery being stalled. Some people are even talking about a double-dip recession. Therefore, I believe the macroeconomic environment, especially in Europe, and in financial services is challenging.
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But you have seen an uptick in financial services space last quarter?
Yes. Of late, issues related to mortgage are shaping up in the US, and even consumer confidence is down. So, there are small concerns about financial services in the American market.
Does your guidance reflect the macroeconomic challenges that you anticipate?
Yes, because when there is concern about the global economy, it is better to be cautious. Also, we are aggressive in recruiting which indicates that we are confident of growth in the medium to long-term.
We are seeing some client wins by your peers in Europe? Does it mean that the European firms are going ahead with their spending despite crisis at home?
IT spending in Europe is going to be flat, and our strategy is to expand our presence in that geography. So we are investing, and adding more manpower in the European countries. We are inducting more local people into our France and German operations.
How have your clients and employees accepted your recent realignment?
We are working hard to reduce its impact on clients and employees. I feel the clients are comfortable. It does not concern the employees as it has not affected them. By and large, our client-facing group has not seen any change in its responsibilities, though their reporting structure might have changed to some extent.