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India's second largest software firm Infosys announced its results for the quarter ended June 30, 2011. Its consolidated net profit stood at Rs 1,720 crore, down 5.4% as compared to Rs 1,818 crore in previous quarter.

The company’s revenues rose 3.2% in the quarter to Rs 7,485 crore. On a full year basis, net profit rose 15.72% from Rs 1,488 crore and revenues rose 21% from Rs 6,198 crore in the year-ago period. In an interview with CNBC-TV18, IT bellwether’s management including managing director and chief executive officer S Gopalakrishnan, chief operating officer SD Shibulal and chief financial officer V Balakrishnan, spoke about the quarter gone by and gave their outlook going forward. The management said the company had achieved upper end of the guidance.

The company, they say, added 26 new clients in Q1. “We won three large deals, three transformational deals in Q1. We signed five platform deals in Q1.” The impact of platform deals will be seen in long-term, they added.

According to them, currency impact on margins stood at 0.4%. They see 2.5% fall in FY12 margins, earlier they had guided 3% fall.

Q: The Street was expecting that you would be able to raise your dollar revenue guidance from 18 to 20%. You have stop short of doing that. Why?

Gopalakrishnan: We have had good volume growth this quarter, 4% volume growth. We believe that this year we are going to see an even growth rather than a frontloaded or backended growth. We wanted to watch how the situation unfolds, given that there are still uncertainties in the US market, in European market. So, even though we have done better than what we expected, we felt that it is better to leave it at this point as 18-20% for the year.

Q: In terms of volume people had expected that in Q1 and Q2 you will be hitting 5.5-6%. Are you saying that across quarters you will get to 4-4.5% kind of volume growth this year?

Shibulal: While this year is a normal year, the economic situation is still unstable. There are issues with Europe that are creating delays in decision making. While the IT budgets are frozen or are closed, there is a slight delay in the decision making and the customer reaction times are much shorter.

While we have seen good growth of 4% this quarter, the onsite growth is 6.8% and the offshore is 2.7%, which indicates large number of project starts usually when the onsite grows faster than the offshore. Therefore, while the volume growth is healthy, this year we will see an even growth across the quarters rather than a spike.

We do have the capacity to have a spike. However, our utilization is only about 74%, hence, in case there are opportunities for us to grow faster, and we will be able to take those opportunities. Nevertheless, we believe it will be evenly spread over the four quarters.

Our products and platform space has grown faster than other areas. The business operation has gone up by 4%, the business transformation is up by 4.5%, the products and platform space is high by 8.2%, which is also a different kind of growth. In the products and platform space, we have had five good wins in the iEngage platform; we had one good sell of iTransform through the Infosys Public Service. 

Therefore, it is a different kind of growth because it is in the backend. When you say, you are selling a deal but the payment is over a period of time, this is high revenue productivity per person but over a long period of time, annuity kind of growth and pay-by-use, therefore, it is a different kind of growth.

Q: People are a bit disappointed because in your road shows you informally indicated that maybe Q2 could show a growth of anywhere between 7% to 10% and that is your hardest hitting quarter. Why is it that you have chosen to go with a 3% to 5% sort of growth for Q2?

Shibulal: It is an environment where we need to be cautious. There is economic instability, unemployment, European crisis which are still unfolding. Therefore, there is always the talk about the government spending coming to an end, hence, there is instability in the environment. However, what we are seeing from clients is two fold - while retail, energy and utility clients are growing much better than other verticals, there is still caution in other verticals.

It is creating short term response time and slightly longer decision making times. Discretionary spend is flat and is not really ramping up, so it leads us to believe that we need to be cautious. We have three transformations deals in Q1 more on the pipeline. Our products and platforms are seeing good traction in the market but we have remained cautious with our guidance.

Q: I heard you mention earlier that you expect to see some improvement in the margins compared to what you had in Q1. What was the impact that you took on margins because of the salary hikes? When you talk about an improvement in earnings before interest and taxes (EBIT) percentage performance, how much of a ramp up do you expect?

Balakrishnan: In April, we said the margins in Q1 could come down by around four percentage points and actually it came down by three percentage point. The main impact was on account of increase in offshore wages by 10-12%, and onsite by 2-3%. I think we were able to control other costs; we were able to maintain our margins. The only impact, which came in the Q1, is wage increases.

For the full year, earlier we said the margins could decline by around three percentage points, now the revised guidance talks about 2.5%. Close to 1% is because of the utilisation. Utilisation could drop because we are assuming only 18-20% growth in revenues.

Second, the currency could be appreciating by around 2-2.5%, we are assuming 44.50 for the rest of the year. So that could have an impact of close to 0.8% and rest of it because of wage increases. In any year if we are able to grow much better than 20-25%, we will be able to absorb the full impact of the wages. This year since the guidance is 18-20%, we cannot absorb the full impact of wages. These three factors will come into play for the full year.

Having said that, if the environment is stable and if customers do spend their budgets, quite possible our growth could be better and we would be able to absorb some of it. At this point of time, we are very cautious because the global economic environment has not recovered. The volatility still continues, all the uncertainties, which we talked about in the last quarter, still remains, in fact in Europe it has only become bigger. 

So, we are very cautious because of the environment. But we are seeing the clients are more comfortable, they have a budget, nobody is reducing the budget, and pricing environment is stable. Even in this quarter the pricing was stable in constant currency, it went up by 1.2% in reported currency and constant currency is flat. So, I think pricing environment is stable, clients are still spending, but they are very cautious that’s why our guidance for next quarter also reflects it.