Re-bitten Infy looking at rising India

12 Jul, 2007, 0341 hrs IST,Shelley Singh & N Shivapriya, TNN

NEW DELHI/MUMBAI: In a major departure from its earlier stance of not doing any domestic IT services work, technology leader Infosys Technologies said it would bid for projects in the domestic market on a case-to-case basis. "We will take that decision on a case-by-case basis, depending on the size of the deal, the value proposition and the kind of services," Infosys chief operating officer SD Shibulal told ET in an exclusive interview after its first quarter results.

So far Infosys has been in the Indian market only for its core banking product, Finnacle, and former CEO Nandan Nilekani, had stated as recently as April 2007 that the decision to stay focused on the high margin international software business was strategic one it planned to continue with. Among the reasons the company had cited for not entering domestic market was robust global demand for IT services and the not very attractive margins for Indian IT services. The taxes on domestic IT revenue were perceived as an additional disincentive.

The company's changed stance comes at a time when the rupee appreciation has dented its June 2007 quarter profitability and operating margins have fallen by 300 basis points. It's also a recognition of the growing clout of the Indian market that could be much bigger in the future.

"Systems integration, package implementation, consulting are some of the areas we will look at," said Mr Shibulal. Apart from the rupee appreciation that has impacted the topline to the extent of Rs 287 crore, visa costs and increased salaries have contributed to 7.3% sequential rise in expenditure. While visa costs are non-recurring, the company will feel the heat of the higher wage bill even in the coming quarters. "The first quarter of the fiscal, companies typically take a hit because of the salary hikes and visa costs," said Harit Shah, an analyst with Angel Broking.

However, Infosys has managed to show a 1% increase in revenue productivity in the June 2007 quarter and Mr Shibulal said the company would manage its portfolio of services and leverage services such as package implementation, testing and consulting that command higher rates. Interestingly, the company's consulting business has shown a substantial growth, increasing to 4.9% of its revenues or Rs 184 crore in the June 2007 quarter from 4.3% of its revenues in the March 2007 quarter.

The company doubled (from four to eight), the number of its $80 million dollar clients from the last quarter to the June 2007 quarter, Mr Shibulal said. One of the consulting deals it has won is an assignment from an audit firm for transforming its audit managing process, he said, declining to reveal its value.

The biggest hit the company has taken in the June 2007 quarter is on the BPO business. Here the margins have eroded from 21-22% to 16-17%. Because the BPO business is by definition almost entirely offshore, the impact of the rupee appreciation is felt most on this business. "Because the BPO is also a new business, re-negotiation for many of the contracts has not even started. But even here the new contracts we are signing have an upward bias," said Mr Shibulal. The company is also trying to add value to BPO clients by better value extraction, getting into knowledge management services and get benefits of scale.

In the IT business, newer contracts and existing contracts coming up for renewal are getting higher billing rates, which factor the stronger rupee.