At macro level, clients dont see any change

Written by Rachana Khanzode | Updated: Aug 5 2009, 05:54am hrs
V Balakrishnan
Despite some positive signs of economic recovery, the Rs 5,472-crore Infosys Technologies is still taking a cautious approach. Chief financial officer of the second largest IT company in India, V Balakrishnan, in an exclusive interaction with FEs Rachana Khanzode, says that the IT industry is still anxious about global recovery. He talks about why it has become important for the company to work on its cash strategy, receivables and challenges from its large clients. Excerpts

Do you expect the recent signs of green shoots talked about by the IT industry to continue in the coming quarters

At the micro level, there are some positive indications, but at the macro level, clients dont see any changes. They are still facing challenges in terms of funding their growth, making investment for short or long term. Clients are focusing on cutting costs and pricing pressure is expected to be there for some time. More than 50% clients say they expect recovery in the second half of 2010. If the economy recovers by December, then it will be good. This is because budgets are decided by then and comfort in the economy will push it. There are some positive signs like the financial sectors stabilising with government funding it, but concerns over credit card, quality on receivables and commercial property remain. A lot of clients are not confident of the economic recovery and we are going to be cautious.

Your offshore component has increased to 77.3%. Do you expect it to go up further and to what levels

The global delivery model (GDM) works on 70% offshore component and 30% closer to clients. For BPOs, it will be 98% offshore, for enterprise 60% and maintenance 95%. So, we need to manage at the portfolio level. At the moment, clients have a limitation and total costs need to be reduced. You need to see what more can you offshore so that client gets the benefit. But the onsite component cannot be very less like 15% or so and it has to be between 25-30%.

Your operating cash flows and cash flows, as a percentage of revenue in Q1 FY10 were the highest in the industry at 30.8% and 28.1% respectively. What is the strategy behind it

We normally give credit of 30-40 days to clients, but we make sure we get the receivables on time at the company level. We bill and collect the cash and it has been the focus as it is the area of performance. There is a focus on the credit quality of clients and we make sure that clients who are vulnerable are kept under vigilance through our credit default swaps. We have a good monitoring mechanism and we make sure we collect everything on time. At the same time, we need to have cash in hand for our one-year expenses. We are also looking at acquisitions.

But your large clients are still facing challenges

Our top client was adding 10.3% of revenues at some point time but it has come down to 4.5%. But we are still growing. This is because we are managing a set of clients at the portfolio level.

We need to focus on some other clients and grow them like our more than 300 clients who have $ 1 million as a budget. At the same time, we are not looking at clients who are not bringing additional budgets. So, you saw the net additions of clients is almost flat in this quarter. We are looking at clients with good quality of growth and longitivity.

Could you tell us more on your acquisition plans

We are looking at multiple acquisitions in relatively smaller verticals like healthcare, life sciences and utility from US and Europe (Germany, France) and Japan. These could be as small as $ 100-200 million of revenues. These could be specialised in consulting, enterprise solutions, BPO and infrastructure management.

Investments across the industry are kept on hold. How prepared are you for the recovery

In the short-term, there are no choices for companies like us to cut costs in the area of SG&A. But we are making necessary investments to work closely with clients and so there is higher focus on geographies. In the long-term when recovery takes place, growth will come quickly as our utilisation is 70% and we are still hiring 18,000 people. So, the cost is built in there and so there will be no lean time. Structurally, we are much prepared in such scenario. Investments in front areas are being done for medium and long term and we are hiring locals in most geography. In consulting, we are losing money but still we are making investments. Investments in China, Mexico and Brazil are going on. We are going to open a subsidiary in Brazil. We are making investments in R&D also.