Just do it: V Balakrishnan, CFO of Infosys

In this day and age of high street finance, perhaps no one has a more challenging job than the chief financial officer (CFO) of a modern corporation. Investors and analysts today constantly monitor every statement made by the CFO, who not only manages finances, but also shares the primary burden of creating wealth for shareholders. This week, ET Investor's Guide is introducing a new column 'CFO Speak', wherein we will chat with a CFO about his/her organisation's current plans and future prospects. We kick off the column with an interview with V Balakrishnan, CFO of Infosys.

Thus far, Infosys has been growing organically. Given the thrust shown by its peers in terms of acquisitions, what are Infy's plans for inorganic growth?

We are very selective on acquisitions. We are looking for companies which can fill in some of the gaps in our business model; companies which can increase our access to a particular geography like our Australian acquisition three years ago. We are also looking at companies which give us growth in new verticals like healthcare, transportation and energy utilities. Other targets for acquisition will be companies, which have an intellectual property (IP) around which we can build services. We are looking at companies which will enhance our profile and not just the topline. Recently, we concluded the acquisition of the BPO facilities of Philips. We are keen on inorganic growth, but on a selective basis, without compromising our profitability.

Tell us more about the kind of gaps you face in your current business model?

Geographical reach is one aspect. Presence in European countries with faster growth is necessary. Probably, we can carry out an acquisition in Germany or France. Another region of interest will be Japan. The country is changing. Perhaps, we may look for a small acquisition there. If you look at verticals, energy and healthcare are showing rapid growth. Even in services, we look forward to the consultancy space and enhance value to clients by leveraging our global delivery model. Basically, it will be targeted at acquisitions.

What are the synergies for Infosys in the Philips deal?

We have taken over three Philips centres in the BPO space located in Poland, Thailand and Chennai. The acquisition strengthens deliverables of Infosys in finance and accounting verticals (F&A). F&A is the fastest growing segment in BPO services. Further, it will enhance our global network, since Philips has a sizeable presence in Poland. It also gives us a presence in services in Thailand, where currently, we provide Finacle. Thirdly, access to the 1,400 F&A professionals of Philips places us among the top five global F&A players.

It is difficult to get the skill sets in this space and this acquisition helps Infosys to get exactly that. Apart from this, it enhances our ties with Philips. Currently, it is our small client. The acquisition will help us mine these ties more by selling other services to make it one of our top 10 or top 15 clients. So, it's a great acquisition; small but great…

We believe that the main objective behind the Philips deal was to get entry into the BPO space in Thailand, given the attraction of a less volatile job market. How dynamic do you think is the Thai market?

You cannot compare any market with India. No market has the scale and depth as that of India. No country can match the quality of the talent pool we have. But when we work globally, we have to build global pitches and front ends. Create the front ends globally and leverage the offshore… that's what we are trying to do. This acquisition enables us to have a presence in Poland and Thailand.

What is the structure of risk-based contracts which you have signed recently?

There are some contracts where the clients want to attach some portion of the billing to the quality of output. The client will pay you only if he sees benefits; it will hurt you if he fails to see any. This is basically output-based pricing. But it's not a trend; it's happening with very few contracts.

Has the appreciating rupee changed the way contracts are structured?

Not really. At the end of the day, the cost to the company is what matters to the client. I don't think they will change the pricing because the rupee has appreciated.

Currency is something which we have to manage effectively, and not the client. You can increase pricing only by showing some kind of value proposition. Focus on improving the revenue productivity by going up the value chain. Value is added by increasing the component of consultancy and solutions in the deliverables.

What are the hedging strategies in place?

The currency market is too volatile to have a long-term view. We take a short-term view. We have hedged our revenue for the next two quarters. We undertake both options as well as forwards. In a volatile market, options give a lot of leeway to protect your downside. We mark-to-market all our positions in both forwards and options.Despite a strong desire to be in the consultancy gamut, your presence there is minuscule as of now.

You have to see our consultancy operations in totality. We have 220 employees at Infosys Consulting in the US. We also have many consultants at Infosys. If you add them, you will arrive at a sizeable number. Yes, in the front-end consultancy, we are making losses, as we are still in the nascent stage. In the steady state, it can comprise 7-8% of our margins.

Infosys has announced plans to focus on the local IT market. Is it a change in the mindset or a strategic initiative?

We have been serving the Indian market, though not on a big scale. We never said no to the local market, but opportunities were bigger globally. Now, the domestic economy is showing a high growth rate. As a part of their global strategies, Indian companies are increasing their IT spending to maintain their competitive advantage. The country is slowly investing more and more in IT. And, we think, we should take advantage of this growing market.There is talk of shrinking margins of Indian IT companies, given the fierce competition and changing face of deliverables.

Will we witness an era of lower margins for Infosys as well?

For us, margins are an aspiration. We have and want to have the best margins in the industry. It's a relative statement. I don't know what number or range it will be, but it is going to be the best in the industry. We aim for it and we also focus on growth. There is a huge market waiting to be addressed and one has to focus on the right part of the market. Our focus is on value-based contracts.
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