Scouting for small buys: Infosys CFO

Infosys CFO V Balakrishnan has a tough job at hand. Rising attrition, wage hikes, rising rupee and more taxes, all are trying to hit the Infosys balance sheet. But despite the rising rupee, Infosys managed its reputation of beating analyst forecast and delivering higher bottomline and topline growth. He talks on the problems the company is facing due to the rising rupee and related issues.

By how much has the rupee hurt Infosys balance sheet this quarter?

Our net margin in the past quarter (Q4 FY07) was about 27%. In Q1 FY08, our margins were hit by 7%. Wage hikes (of 12-15% offshore and 5-6% onshore) eroded margins by about 2.5%. A hit of about 1% was suffered due to the visa costs. But an appreciation of 6.8% in the rupee gave us the maximum hit, of 3.5%. However, better employee utilisation and flexible financial model enabled us to overcome it. All our subsidiaries are doing well except Infosys Consulting and Infosys China which are in losses. In IT services, we have a natural hedge with about 26.2% revenues coming from Europe vis-a-vis 64% from North America.

But you decreased your rupee EPS guidance for the year?
We increased our dollar guidance but decreased the rupee guidance to factor in hit due to the rising rupee. Nevertheless, we have hedged for almost $925 million. But hedging can only curtail the hit by currency appreciation to a certain extent. We are trying to increase our geographical spread and increase our non-dollar clients.

Should the government do something to curtail the rupee rise?

The government cannot control inflation, interest rates and currency fluctuation at the same time. A certain appreciation in rupee is fine but a large amount (about $5 billion) of speculative and arbitrage money which flows in every month in India is creating the problem. The government should control it.
Rupee appreciation in IT firms can be countered by its natural hedge of working in different currencies. But BPOs which work at a thin margin (Infosys BPO margin is about 17%) are certain to take a hit due to rupee rise. If the government does not control it, India may lose its cost advantage in BPO sector.

Is linearity between revenues and employees hurting you? How are you trying to tackle with it?

Managing scale is an issue which Infosys has been grappling with for quite some time. We are about 76,000 employee strong as of June 30, 2007. We plan to hire about 26,000 employees this fiscal which may make us a one lakh plus employee company. To tackle this problem, we are diversifying into newer services which offer better revenue per employee.

Is Infosys scouting for large sized acquisitions? Are you bidding for Capgemini?

We cannot comment on rumours. But what I can tell you is that Infosys is scouting for acquisitions. Instead of large, we will focus on small-sized buyouts which come as a strategic fit. The acquisition will be either to penetrate new service lines or acquire capabilities in infrastructure management, testing, BPO services etc. Else, the buyout will be driven to penetrate a different geography or market.

Are you renegotiating contracts at higher billing rates due to rupee rise? How many of the 35 new clients added this quarter came at higher billing rates?

A significant portion of the 35 new clients we acquired in Q1, came at an increased billing rate, of about 3-4% higher. We are in constant dialogue with our clients to increase billing rates. But most of the re-negotiation happens at the end of the of the contract. In return we have to add more value. It’s a give and take relationship. But the client has to agree.