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To quote the old saw, there's no "I" in team -- but there is an I in "BRIC," the acronym coined to describe the four leading emerging markets of Brazil, Russia, China ... and India. Today, we bring you a few words of Foolishness from one of the premier Indian firms, IT outsourcing firm Infosys
Rich Smith : Thinking back to your post-earnings conference call, did you get a sense of what is most concerning the analysts who follow you?
V. Balakrishnan: The state of [the] U.S. economy is of course at the top of their minds. The possibility that the U.S. will slip into recession, and what affects this will have on IT budgets and spending. So they're mainly worried about macroeconomic news.
What we told them about this was that we've seen some delays in our U.S. customers finalizing their IT budgets. Budgets that would normally be finalized in January are being delayed to, say, February.
Smith: And how much does that worry you?
Balakrishnan: It is of course a challenging economic environment. But the way we look at this, when times are hard, our customers are going to focus on using their money efficiently. Right now, the economy is looking quite painful, and we would expect our customers, for example in the financial services industry, to try to move more of their software work offshore in order to cut their costs. So for us, this is an opportunity as well as a challenge.
Smith: At The Motley Fool, most of our readers are individual investors who may not have a lot of time to parse every line of an earnings release. What's the single most important statistic an individual investor should look at to gauge the health of your business?
Balakrishnan: Two things. First, your individual investor should focus on our revenue growth, and second, on the growth in our operating margin. And at Infosys, both of these are still growing faster at 30%.
We've also continued to maintain our margins despite the rise in currency exchange rates. Last year, I think the rupee appreciated approximately 14% against the U.S. dollar, for example. While we are losing some customers to global IT firms that are pricing their services competitively, customers who focus on our capabilities and the quality of our service, who don't contract exclusively based on who offers the lower price, we're continuing to maintain our relationships there.
Smith: I have a numbers question for you, Bala. Reviewing your past cash flow statements, I've noticed that Infosys generates significantly less free cash flow than it reports as net income. And to be fair, this seems to hold true across the Indian software sector. Wipro
Balakrishnan: Our competitors operate primarily in countries where there is an existing infrastructure for business, and they don't have to spend as much on capex as we do. As you can see on our cash flow statements, we spend a lot on infrastructure ($265 million for the nine months ended Dec. 30, 2007). Our net cash generation was about 19% of our revenue for the nine months ended Dec. 30, 2007. We invest around $13,000 per person on infrastructure, including land, buildings, technology, etc., and we recoup these investments over 10 to 12 months usually. But basically, that is the reason. We have to spend more money on capital expenditures than some of our competitors do, and this to some extent impacts our free cash flow.
Smith: Now, a few questions that are more broadly about the economic environment in India. We know that the campuses and business parks are wired for the future and thus allow for outsourcing. What actions are being taken to bring high-speed broadband to the masses, and when will that happen?
Balakrishnan: Generally speaking, broadband penetration is growing across India. Overall, the economy is growing at about 8% to 10% per year. But in the mobile industry, for example, growth is much faster -- 70% to 80% per year. Broadband access to the Internet is also growing very fast, but the fastest growth is in the mobile connections. As for broadband access in particular, this is primarily wire line and not wireless.
Smith: We've read a lot recently about Tata Motors' new $2,500 "Nano" car. The car threatens to undercut foreign carmakers like Nissan
Balakrishnan: Undeniably good. The biggest challenge for this country is the affordability. We need products which can be affordable to the masses. Right now, people who move around in the cities do so on two wheelers. Because the Nano is affordable, it will simply move people from two-wheelers to four-wheelers. It will be much safer. This is a good thing.
Smith: But if the Nano becomes popular and Tata sells a lot of cars, won't those clog up the roads really quickly, worsening congestion? Would you see the trend of increasing Internet access, and perhaps worsening road congestion, as encouraging telecommuting among workers -- a trend that's increasing in popularity here in the U.S.?
Balakrishnan: Over time, perhaps. But not immediately. You see, workers here actually prefer to work in an office atmosphere. Plus, we have quite good mass transit systems coming up in all larger cities across India. Bangalore is building a new metro. Of course, land and office space is getting more and more expensive, so it is possible that telecommuting would offer a way to solve that, but not now, no.
Smith: So you've mentioned improvements in Internet access, mobile, and broadband. The metro in Bangalore. And I'm guessing all the new Nanos will require more road construction. Where is the money going to come from for the massive improvements in infrastructure?
Balakrishnan: Oh, money is not the problem in this country. Execution is the problem. We had some $10 billion to $20 billion in foreign direct investment last year, and the government has $300 billion in reserves. The private sector and the government are working in partnership making these improvements, and there is plenty of money to finance them. All we need to do, really, is make sure that the work is executed properly on time. The key is execution.
Smith: One of the big knocks on India has been that it's a country with a lot of red tape and regulation. When is the logjam in the political world likely to improve so free market opportunities and greater foreign direct investment will improve?
Balakrishnan: I think there is a fundamental misunderstanding in the West on this point. What you say used to be true, but over time, India has moved increasingly away from regulation. In the software industry, for example, we have almost zero interference from the government. There could be some interference in certain sectors like telecom or banking, but in most parts of the economy, red tape has been cut.
Smith: Are there any impending legislative initiatives we should be aware of, that might further this trend?
Balakrishnan: There is a new companies bill being considered, that will help deregulate even more red tape. A new tax code is being looked at. And Parliament is also working to reduce restrictions on foreign investment in certain sectors, such as insurance.
