Don't expect higher pricing next year: SD Shibulal

IT major Infosys reported stronger-than-expected third quarter results on Thursday. The company’s consolidated net profit rose 33.25 per cent to Rs 2,372 crore for the quarter ended December 31, 2011. The profit after tax (PAT) of the company rose 24.4 per cent to Rs 2,372 crore in the third quarter against Rs 1,906 crore in second quarter.

Infosys said on Thursday that it does not expect any growth in the pricing of contracts going forward. This is the worth of each contract it signs as a vendor with customers. The company got about 5 per cent hike over the past one year when it signed up new customers or renewed contracts. However, the outlook is of a flat pricing scenario going forward. This means the company will have to renew contracts or take on new contracts at current prices. This affects the overall revenue and profitability of the business.

In an interview with NDTV's Prashant Nair, SD Shibulal, CEO and MD, Infosys and Rajiv Bansal, VP and Head (Finance), Infosys give a bird’s eye view of the company’s current quarter performance, overall business and future plans.

Below is the complete interview. Don’t miss the accompanying video.

The fourth quarter guidance is weak, absolutely flat. Could you talk about it?
 

Shibulal: Before we talk about the fourth quarter guidance, we should talk about the third quarter in which we have done well, despite being closer to the lower end. We have 3.4 per cent growth in reported currency and 4.4 per cent growth in constant currency. We have achieved 3.1 per cent growth in volume. 


If you look at the last nine months, we have added 120 clients (in total). We have added 49 clients out of which six are Fortune 500 clients, which means we have got strong client additions.

Can you please breakdown the client addition numbers for us? How many are large $100 clients.
 

Shibulal: If you look at the number of million dollar clients we have, now it is 391, while it was 388 in the last quarter. So, you can continuously see improvement in the client revenues. Plus, we signed five large deals in the third quarter, out of which, two were above $500 million. So, overall we have witnessed strong deal closures and client additions. 


On the products and platform side, we have $300 million in TCV (total contract value). When you have $300 million the amount gets spread over a period of time. It is a sticky business. We are seeing strength in the new strategic areas chosen. 


Now if you look at the environment, it is definitely uncertain. There is an economic crisis in Europe. We are not seeing a very strong political will. It is different from the 2008 crisis. The 2008 crisis happened very fast and got addressed very fast too. However, addressing the European crisis will take time. But it has led to a reduction of the confidence of our clients and velocity of our business. We are seeing delay in decision making and larger deals are being scrutinised closely. 


Thus, our guidance for the next quarter is a reflection of the environment we see. Hence, we have to remain cautious. Where deals have been closed, the ramp up is slowing down.

You said that you have strong client addition, but you are also saying that the macro environment is uncertain. How both of these things go hand in hand?
 

Shibulal: Client addition is an indicator of growth. These clients have a large amount of budgets. At the same time, because of the environment, the decision making is slow. Our quarter to quarter growth happens when decisions are made fast, when new programs are initiated on a daily basis. But the decisions are not made and large programs have come under scrutiny. Hence, in such situations, we have seen ramp ups slowing down, that means deals which are closed, are slowing down.

 Rajiv, the fourth quarter guidance in the US dollar terms is 0 to 2.2 per cent sequentially. If i exclude Portland, it’s a sequential decline of 0.11 to 0.33 per cent quarter on quarter. Can you throw some color on that?
 

Bansal: Where we have added clients, the moment the environment turns better, the ramp ups would be faster because we have already shortlisted the vendor with the client. So when the client stats taking a decision to spend more money, you will typically, send out more business to the shortlisted vendors. So, we have a ramp up. We have increased out hiring from 45,000 to 47,000. So, hiring is happening. 


If you look at our quality of growth, client addition and revenue growth for this year has been of superior quality. So, it is not about just one quarter. Pricing increase is 5 per cent year-on-year in reported currency and 4 per cent in constant currency. Pricing is likely to be flat next year. It has gone up over the last nine months and is likely to remain stable. Pricing will not come down. 


The revenue in this quarter will depend on client budgets and their expenditure. But since budgets are closed, it is very difficult to put a number for the quarter. As we move on and see the spending happening, we will know where we stand.

 What does it mean for FY13 in the fourth quarter guidance? Does it imply a slow start? Should we assume that the growth will come in the second half?
 

Shibulal: We assume early indicators, the budgets are getting closed and they will close by mid-February. Early indicators are that the budgets are either flat or down. 


So the critical issue is the closure of budgets, but there is another part to it, which is the client's confidence in spending. It depends on the environment, which is volatile.

 What can be the reasonable estimate for FY13? How does it look like from the fourth quarter guidance point of view?
 

Shibulal: Well, it is too early for us to discuss that. We will be prepared for this discussion in April. Clients have tremendous interest in offshoring and us as a company. Clients are making their choices as whom they want to work with when the time comes. We have seen very strong client addition.

There is a kind of a flip-flop in the guidance policy since a few quarters. How would you address that? 
 

Shibulal: But the environment is very different during every quarter; it is very volatile. There is lack of confidence; economic, currency and regulatory volatility. We are operating in this unstable, volatile environment. We are also not seeing the political will to get things closed. 


Bansal: We state as we see it. So in the beginning of the quarter, we always said we would have a visibility of 95 per cent of our revenue and we have to make up for the remaining 5 per cent. By the end of the year, we have 60 to 65 per cent of visibility. Our guidance is a statement of fact. 


Our guidance has not been moved up and down again and again. In the beginning of the year, we gave 18 to 20 per cent, later 17.1 to 19. 1 per cent. We have met all the guidance we have given for all three quarters. Only the fourth quarter guidance has been revised. So there is no flip-flop in that. Analysts look at minimum conservative guidance. But we are giving facts. We are not building it. Now it depends on how the market reads it.

You said 5 per cent growth in pricing year on year. What is the trend? How can you extract better pricing?
 

Bansal: This is where the quality of growth comes into the picture. If you are able to add value to clients budget, that’s when they give you better price. If you look at the last one quarter, the pricing has been stable. We don’t expect an increase in the same next year. Pricing may be flat for the next year, but won’t come down.  


Shibulal: Our focus will continue to be on high quality growth and our price increase will be a reflection of that. It is good to have a number of like 5 per cent. Our focus is to strengthen the strategic partnership with our clients and be more relevant to them and deliver superior business value.

What about your business growth in the US and Europe?
 

Shibulal: While Europe is going through tough times, offshoring in Europe is low, which is an opportunity for us. One of the 500 deals we have closed in this quarter is from Europe. This is again a result of the strategic investment we have made in the Europe. 


Bansal: Our business in Europe should grow faster but it all depends on the investment in Europe. Offshoring is not so big in Europe. So, when they are under the pressure to perform and look at outsourcing in a bigger way, we will start picking up.

What kind of issues the European CEOs are facing there?
 

Shibulal: Most CEOs are grappling with how to increase growth in a volatile environment. They have cash in banks but are not sure how to spend it. There is volatility in euro and other currencies. The revenue growth in larger corporations is a concern.