After a dismal March quarter, Infosys turned the tide beating analyst expectations. Chief Financial Officer Rajiv Bansal gives his take on the challenges the company faces and how it is looking to improve predictability in earnings.

How do you explain the fluctuation in earnings for Infosys, which alternates between strong and weak performances?

If you look at the last 5-6 quarters, we have had three good quarters, a couple of quarters where we had declining revenues and one average period. This reflects the environment that we operate in, in terms of client segment, business-mix etc., it is so volatile. The macroeconomic data are still not looking good in geographies such as Europe. Australia is going through a tough period; their currency has depreciated more than 10 per cent. China is experiencing a slowdown too, so the macroenvironment is so volatile.

So we have done reasonably well this quarter, but this cannot be extrapolated into the future. This is the mistake the markets did as they extrapolated our good showing in the December quarter and assumed it would continue into the future. So, our performance in the June quarter must not be extrapolated.

Given the uncertain environment that we operate in, it is hard to predict if this performance will be repeated, unless we get at least a couple of quarters of consistent performance, which will give us the confidence that it is sustainable.

Is pricing decline a matter of concern, especially in large deals?

What is encouraging for us is that now the volume growth has picked. It was 1.5 per cent in the December quarter and it is 4.1 per cent now.

But pricing is an issue for us. Over the past several quarters, we have had decline in pricing in most of those periods. We are seeing that large outsourcing deals are more price-sensitive; they are coming in at lower pricing points and profitability.

In large deals, there is definitely some pricing pressure as clients have advisors on pricing. They also know about the pricing points of other vendors. But it is up to us to work out the margins. With large deals, our revenue is booked for the next 4-5 years and so we will have to spend less on sales efforts, there will be productivity improvements which will help margins. We can also move projects offshore. So it is possible to maintain margins, even if pricing comes down.

Consulting and package implementation, a discretionary service, has driven growth for you, as in the December quarter as well. Is pricing under pressure there as well? Would you rather give discounts for such offerings?

The pricing pressure is across services and not restricted to consulting and package implementation alone. In the bread and butter business (application services), unless volumes are high, there will be pressure on pricing as the space is more commoditised.

Consulting and system integration is an area where we have pricing power.

What steps are you taking to make earnings more predictable?

We have to engage more with the clients, look at how their spends are going to pan out etc. Earlier, clients would make their budget and the CIO would be sure about spending that money. This helped us plan accordingly. Now, the clients are making the budgets, but it is uncertain if they will spend the money. The level of scrutiny has gone up. Today, a lot of large transformational deals go right up to the CFO or the board for approval. As the decision makers change, the predictability becomes low. Then there are instances of the RFPs (request for proposals) being released, but the project being shelved as no decision is taken.

How many people are you looking to hire?

We have not given any guidance on hiring. Our utilisation is at 75.9 per cent, excluding trainees. So there are enough people on bench or on training whom we can utilise. Depending on our growth, we may hire more. With respect to fresher hiring, all those whom we recruited on campus will be joining us this quarter.

Why do you have large bench strength when your utilisation is still 7-8 percentage points lower than many peers?

It gives us the elbow room. If there is an uptick in revenues, I will need these people. We can absorb seven months of bench costs with one months’ billing. Then there is natural attrition. We will not higher freshers, but may have to hire people at middle and senior levels.

The company has incurred a large forex loss of Rs 418 crore due to options and forward contracts. What is your hedging strategy?

You cannot take these losses in isolation. In any forward position, you will have a hedge book at a certain rate. Every body was expecting the rupee to appreciate to Rs 53-54 to the dollar. Every company has its hedge book at Rs 55-56.

But if you close at Rs 59.39, you will take a marked-to-market loss. At the same time, there are translation gains. So both have to be seen together.

Our strategy has been to ensure that any hedging loss should be made up by translation gains. The net impact has been positive for us despite the extremely volatile rupee. We always hedge short term. We always ensure that out hedge book is in line with the net asset position in the balance sheet.

Your tax outflows have gone up…

This is due to the fact that the rates have gone up because of the increase in surcharge. The other reason is because be got a R&D tax benefit last quarter, which was $14 million.

Our effective tax rate is likely to be around 27 per cent.

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