'Going ahead, we’ll move cautiously'

'Going ahead, we’ll move cautiously'
The Financial Express, Corporates & Markets, April 16, 2009, Section I, Page 1

The first Indian IT company to declare its full year results, Infosys Technologies said that the expected revenue decline in FY10 will be due to the combined impact of pricing and volumes. In an interview with The Financial Express’ Rachana Khanzode and Surabhi Agarwal, V Balakrishnan, CFO, Infosys, says that the firm would spend more on sales and marketing in this environment. Excerpts:

•What are the factors on which the FY10 guidance is based on?

It is based on the kind of visibility we see in the market at the moment. Our interactions with clients at the moment indicate that we could see a better business environment by early to mid financial year 2010.

But, we want to be cautious going ahead. Some encouraging signs have started coming in. For instance, around 60% of our clients have decided on their IT budgets.

•You are also expecting pricing to be down by almost 5.7-6% in FY10 versus FY09. How do you decide on these figures?

The pricing for the third quarter went down by 1.4% and this quarter by 2.1%, so we have an average of the decline. We expect it to continue at the same level for the full year as the business comes on a year-on-year basis. We expect the utilisation to come down and revenue to be down by 3-7%. It will be a combined impact of pricing and volume.

•So, are you seeing price negotiations happening repetitively?

Most of the clients renegotiated price and if the environment goes worse, it might happen again. But we have to manage it and we are not seeing steep pricing cuts.

•You have added 37 clients this quarter. What is the usual contract size of the new clients?

It varies from client to client. As much as 40% additions are in the financial sector. In large deal terms, which is more than $50 million, we have won some 4-5 clients during the quarter. Clients are not willing to make any large commitments now, so there are no big deals happening. But $50 million to $100 million deals over 3-4 years time are of reasonable size and we will see more of them.

•How much has been the forex loss this quarter? What will be your hedging policy going forward?

We had a loss of around Rs 15 crore for the quarter. We want to hedge for the short-term, given the volatility in the currency. We are hedged for our next two quarters’ exposure at any given point of time. We have hedged around $506 million at a mark to market rate of Rs 50.72. Since we get around 17% from UK pound, 6-7% comes from Euro and 5% from Australian dollar, our other currency hedging would be around $100 million.

•How effective have your cost cutting measures been?

We have been efficient in controlling our costs. But this is the right time to spend on sales and marketing and so we will be hiring people, though it will be a bigger cost for us. But, there will be no wage hikes for existing employees.

•There is a two percentage point decrease in time and material contracts. This is opposite to the industry trend where companies are trying to reduce dependence on headcount...

I think clients are concerned about controlling the total cost of ownership. To some extent, they can do that by going for fixed price contracts. So, fixed price is increasing in the short-term but it won’t become a trend. Clients are very clear that if they do fixed price, the productivity benefit will come to them.

•What has been the impact on margins?

This year the margins went up by around 2%. Next year also we expect operating margin to come down by 300 bps because of the pricing pressure.