Don't see price pressure; margin will return to 15%
News | 18 Jul 2013
Zensar Technology is confident of returning to 15 percent operating margin, on the back of robust deal pipeline and is also not seeing any pricing pressure for the remainder of the year.
Zensar Technologies , which provides infrastructure management services, is confident of returning to 15 percent operating margin aided by robust deal pipeline. Vice Chairman and CEO Ganesh Natarajan told CNBC-TV18 that the company is not seeing any pricing pressure for rest of the year The Mumbai-based IT company's operating margin in first quarter fell to 13.9 percent from 14.6 percent a quarter ago. "This quarter we have invested very heavily in a new sales team. The idea being to chase the businesses which are between USD 15 million and USD 50 million and I think that has pulled down the margins a little bit," Natarajan said. The company reported 56.4 percent sequential growth in first quarter consolidated net profit at Rs 61 crore led by other income of Rs 30.4 crore. The revenues grew by 4.6 percent quarter on quarter, from Rs 508.14 Crore to Rs 531.28 crore. It recorded volume growth of 1.8 percent in constant currency terms. Below is the verbatim transcript of the interview: Q: Could you tell us what the dollar revenue, volume growth as well as what kind of pricing you saw in the quarter that went by? A: The dollar revenue was good for our enterprise business. In fact if you look at the enterprise services in America, which includes our application management, grew nearly 6 percent, similar growth in Africa. We were little flat in other markets because Japan is not particularly growing at this point of time. Our infrastructure management business, we have reduced some of the non-profitable areas. So there it was pretty flat quarter-on-quarter (Q-o-Q) but overall it has been an excellent quarter and given the pipeline that we have of over 300 million, they are looking pretty well at this point. Q: Can you give us the numbers in terms of consolidated dollar revenue growth, volume growth as well as any kind of pricing pressure? A: consolidated volume growth has been 1.8 percent in constant currency terms. Pricing pressure is none at all, in fact today we are in multiple discussions whether the pricing can be substantially higher because we have also changed our model substantially. So both in terms of revenue and profits and of course pricing, I do not see any problems at all for the remainder of this year. Q: You have posted margins of 13.9 percent, a tad lower than the quarter ago which was 14.6 percent, should we assume that in the coming quarters you will get back to 15 percent levels? A: Very much so for a simple reason that this quarter we have invested very heavily in a new sales team. We have three heavy hitters, both in the US as well as the UK and in India. The idea being to chase the businesses which are between USD 15 million and USD 50 million and I think that has pulled down the margins a little bit but going forward given the pipeline we have, we are very confident of this financial year. Q: When we had spoken to you last month, at that time you had indicated that you are looking at two-three good opportunities with respect to deals that are likely to close in the next four-six months, have you all managed to close any deals off late or is it just in the offing? A: That is still pretty much part of the plan. We are in discussions, we have a couple of investment bankers but as I have said repeatedly, unless we have the perfect fit whether it is in infrastructure and management or in SAP or product engineering which are the three spaces, we will not do a deal but currently in discussions, looking positive but no imminent deal in sight. Q: If the immigration bill was passed of course indications are it ought not to be passed in the way in which the house has passed it but nevertheless, how much of a margin trimming are you seeing because of higher Visa cost? A: We do not see anything significant for the simple reason that we don’t have any change in business model because we are already 50:50 compliant. Out of close to 800 people, we have over 50 percent are American citizens or residents, we don’t have that problem. We do not expect the house to come up with a bill, which has these draconian displacement and outplacement clauses. So if we don’t have that, you have a moderate increase in the Visa fees, they are pretty good in terms of how we can counter the impact if at all the immigration bill. Q: You spoke about the possibility of pricing increasing, how much would it be and how soon? A: Today a lot of our discussions are moving towards what we call systems of engagement. What systems of engagement means is that many of our clients are saying can we look at cloud, can we look at social media, mobility, analytics? In these areas pricing is almost 5-6 percent higher than the systems of record so my own estimate is that if 20 percent of the deals we sign in the future are more towards the new areas, that pricing will automatically remain pretty high and pricing is still buoyant for other deals. We haven’t had any request from any customer to reduce prices. So pricing is not an issue for this year. Q: You were a National Association of Software and Services Companies (NASSCOM) chief, you would have some idea of what the industry is experiencing, can you extrapolate your reasonably positive experience to the industry? A: I would think that the industry if you look at what Infosys has done, what I am sure TCS Tata Consultancy Services (TCS) will do and most of the other players -- I think I mentioned this last time on your show --the 12-14 percent NASSCOM guidance of constant currency growth is still very much a possibility. So I wouldn’t worry about that. I know there have been some lower numbers coming from some of the large multinationals including IBM, to a certain extent Accenture but at this stage, given the model we have which is as I mentioned earlier both existing systems and looking at new dimensions, all our companies are good enough to be able to deliver that kind of growth. Q: Other income has come in at Rs 30 crore. If the rupee continues to hover at current levels and with the hedging policy of the company in place are you likely to see such good forex gains continuing in the next quarter perhaps? A: We have modified our coverage policy. In the sense we used to cover about 60 percent of our receivables. Given the fact that the rupee hit 60/USD and of course we fully expected the RBI to intervene and they have done so we have now covered almost 85-90 percent. I do not think even if the rupee hopefully comes down to 57-56, we will have any adverse impact. Of course the bumper 20 crore we have got this quarter will obviously not repeat. But our operations are successful enough and the outlook is good enough to ensure that we meet all our numbers.