CEO of Infosys, Salil Parekh talks about the Q1 results, the impact of COVID-19

Interview source: CNBC-TV18

Q: It is been a relative outperformer of the IT sector, in fact, it has beat analysts’ expectations and specifically for you at Infosys you have been able to deliver a very strong quarterly performance. Let me ask – if you were to break things up in terms of what has worked for you from a strategy perspective? Cost avoidance, you have spoken of cost reduction where you have done away with travel, cut down on marketing spends etc. and finally the cost levers like automation, now how much more can you do on each of these pillars to try and ensure that the growth that you have shown is resilient?

A: We had a good quarter as you shared. I think some of the strategic choices we made a few years ago are really starting to give good results. One of them was a very strong focus and pivot to what we have been calling digital and cloud and it so happened that during this crisis which is truly unfortunate from a global and Indian perspective, many large enterprises have actually accelerated what they want to do with digital and cloud and that has helped us. You might have seen we reported 25 percent growth in our digital business in that quarter.

The second, we have also seen a lot of traction on what we are looking at in terms of large digital transformation engagements with clients. You saw the announcement that Vanguard made just a few days ago and those are the sorts of things that we had really focused on and we think that is giving us some benefits.

Then of course we had a real incredible focus on what we call ‘work from home with speed’ and all of the technology, infrastructure and investments we have made in the past really helped us. If you notice, 99 percent of our employees are today enabled to work from anywhere and we did this with extreme speed and so that whole what has been termed as a supply-side issue was not a big issue for us in the quarter.

Q: Let me pick-up on one of those issues that you spoke-off and that is the digital acceleration that is currently underway. What about the large transformational deals, you have talked about Vanguard but is that a one-off and where do you expect these large transformational deals to come in from, which sectors, which verticals particularly?

A: The thing about this large transformation area is it is not very predictable, they are more volatile in that sense. However, we have been fortunate, we have had one in the teleco space a couple of years ago, we have had one in the financial services space a year ago, this one here again is in the financial services. My sense is a sector that are most seeing it looking ahead, we will see some of these again in the hi-tech area, we will see some of this in the manufacturing area, and we will again see some of this in financial services. But it is not easy to say it is going to be exactly this sector at this time.

The thinking for us is to prepare a foundation which allows us to be participating and when these sort of opportunities come up – if you are ready for it will be fortunate to win those.

Q: Do you believe that this pipeline is looking strong on the back of the engagements that you are having with clients, the Vanguard kind of deal pipeline is looking strong at this point in time? Do you anticipate that you could be closer to closure on some of these kinds of deals?

A: The pipeline is absolutely strong again as we have shared. We think there is a lot of discussion we are having with clients on large deals. As I said the timing of these things is never clear and we of course have a lot of things in discussion with clients. We will see how that plays out over the coming quarters.

Q: I want to talk about what you are seeing as far as pricing is concerned, now you spoke about pricing discomfort to use your words in sectors like retail and manufacturing. Have you seen any easing there or have you seen other verticals now also resort to pricing discomfort? In terms of price discomfort how much of it is temporary and how much of it do you believe is likely to be more longer term. How many clients are now coming back and saying look we want to re-negotiate on prices?

A: What we have noticed in this quarter, the first quarter of the financial year was some anecdotal specific, small number of instances where we have this pricing discussion and especially in retail and manufacturing. It is not at this stage widespread, it is not a discussion across all sectors, and what I saw as we went through the quarter there was more of it when we sort of were in the amidst of the real difficulties globally in the April for the time frame, but not so much as we went on. We do think we will see some instances, but I don’t see this as a widespread issue at this stage.

Q: If you don’t see this as a widespread issue just yet and you believe that it is largely so to focused around retail and manufacturing, which sectors perhaps could look vulnerable, what is the feedback that you are getting from client at this point in time because we are still dealing with uncertainty, the demand situation is yet to see a recovery, so which sectors do you believe could be vulnerable and could be forced to look at price reductions or renegotiation?

A: At this stage we have not seen any other of those sectors that we work in. We have only seen this in a part of retail and a part of manufacturing. My sense is at this stage it doesn’t look like it is spreading. It also depends on how the global situation evolves. We have seen a lot of fiscal stimulus, a lot of support from various governments all around the world and with that we see many enterprises starting to come back. Of course at the end, it is going to depend on what the medical situation is and if that holds up then we don’t see any big changes. If we have more issues, the cases rise and other situations happen on the medical front then we will see if there are other sectors but at this stage, no other sectors.

Q: Let us talk a little bit about the margin outlook and you have held out a guidance for FY21 between 21 percent and 23 percent and you have seen an increase and an improvement there, do you believe that we could see much more specially in the context of this work from home aiding margins going forward? I know you have said that it is still too early and premature to talk about how much of the workforce is eventually going to be work-from-home, you have talked about the hybrid operating model unlike TCS that has given out that guidance of 25 percent of the workforce operating from home by 2025 but what does this going to mean structurally as far as margins are concerned going forward?

A: In terms of margins given the guidance we had real focus in the first quarter on being careful with cost, it is one of those situations as we went into the end of March we were seeing all around, there was great difficulty globally and in India and just being prudent we were extremely cautious with anything which was not required in the spend department. That has benefited us massively as we saw in the results.

Looking ahead, our view on work from home and I have shared this before, we have this concept that we look at called Social Capital and here because this is something we built up over the years within the company, working with different teams and individuals, different groups working together, it was somewhat simpler with the technology infrastructure we put in for us to quickly go to work-from-home but I don’t think it is something that we will sustain for a very long period ongoing.

Of course, as long as the medical crisis is there, we will absolutely be able to sustain it. What we will emerge with is something which is a flexible model going forward but this Social Capital at some stage that we are now using will have to regenerate and for that we will need the office environment in whatever shape or form that is. So we have not set a target, we don’t see a clear view of what that is going to be. What we are very clear about is there is going to be a flexibility in how people work. How does that affect margin we have not done detail computation on what that is going to be because we don’t have a model on what percentage is going to work from where.

We think of course whatever efficiency we can drive, we will drive into it and we are comfortable for this year with this 21 percent to 23 percent margin guidance.

Q: You have been focusing very aggressively as far as cost measures are concerned, cost avoidance as well as cost cutting. Where are you going to be investing especially in terms of beefing up your capabilities or bridging the gaps that you currently foresee that you may need to in order for you to be able to leverage the opportunities that are coming your way? So we have heard from you on the cost side but what about the investment side specially to beef up capabilities required?

A: There on the investments, we spent a couple of years ago almost six-nine months making significant investments especially in our digital capability and the rescaling of our employees. We think that investment was a one-of to step change investment to get us back on track. Now we continue to do investments but the approach has to be for us today, it is done from within our operating structure. So we have in that sense a strict focus on making sure we stick with our margin guidance and then be very efficient overall that we find investment opportunities that we put into the business. For example, we are very strong on the cloud space and on the cloud space we have extremely good partnerships with the leading players and we are routinely ranked number one or two with the way we partner with them. These thins help us massively because that is what clients are looking for today. Those are investments that we need to make how we work with our partners, what type of skills we bring in, what type of people we bring into the company and so on. So those are investments that are ongoing but we don’t have another set of investments, which come at the expense of margin now.

Q: Back to cost rationalisation now, 48.5 percent of your work force is at the mid-management level compared to about 36 percent in FY2014, do you believe that you may need to make changes there as you look at more cost levers? Also, in terms of hiring, I know that the focus and the emphasis has been on rescaling but what is the outlook as far as hiring is concerned, you are on-boarding the campus hires that you are already committed to?

A: There that statistic is quite telling as you rightly pointed out. The thinking for us is – we are on a growth trajectory. So if you look at last year, we had 9.8 percent growth, the year before 9 percent growth. We feel comfortable that once we are outside of the crisis, we will be back to a good level of growth. In that environment, once you start to grow and in a sense start to have much more recruitment at different levels, especially at the college graduate level, we think those statistics will start to become more normalised overtime and that is our approach to drive it. There is no other approach to driving that statistic.

In terms of recruitment, in Q1 we recruited over 5,000 people worldwide, we continue to recruit. All the recruitment offers we have made, we are continuing with those and we see now with the guidance we have given for growth, we see that in small ways recruitment will continue all through this financial year.

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