Infosys Ltd (INFY) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Infosys Technologies Fourth Quarter Fiscal Year 2002-2003 Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session. This call is being recorded at the request of Infosys Technologies. Participants who have any objections to such recording may disconnect at this time. I would now like to turn the call over to Mr. P. R. P. Ganapathy, Investor Relations Officer. Mr. P. Ganapathy, you may begin.

Thank you [Alfa]. Hello everyone. Good morning, good evening -- wherever you are joining us from around the world. Thank you for joining us today to discuss the results for the quarter and year-ended March 31, 2003, which is our fiscal year 2002-2003. I am P. R. P. Ganapathy, known as "Guns," and I handle Investor Relations for the U.S. based in Freemont, California. I have joining me on this call today Mr. Nandan Nilekani, President and CEO from our conference room in Banglore with some members of the Senior Management team. We begin with a short statement by Mr. Nilekani and then turn it over to other members of the management team and then open it up for questions. Before handing it over to Mr. Nilekani, I would like to caution that anything we say that refers to the future, must be read in conjunction with risks that we face, and those risks can be found in our filings with the SEC, Most lately, our Form [F-3] as well as our Form 6-K that is filed for the quarter ended December 31, 2002. I would now like to hand it over to Mr. Nandan Nilekani, President and CEO of Infosys.

Thank you Guns, and I would like to welcome all of you to this analysts call for the quarter and year-ended March 31, 2003. We have had a good performance in the quarter and in the year, and we have met our guidance in spite of a very challenging environment. Our fourth quarter revenues were at $260m, up 54.7% from the corresponding quarter last fiscal. And Earnings per ADS was at 40 cents as compared to 32 cents in the corresponding quarter in the last fiscal. We added 28 new clients during the quarter and a gross addition of 1,539 employees, including 360 lateral hires, leading to a net addition of 1,298 employees for the quarter. Now we have also given the outlook for the next financial year and for the first quarter in next financial year. For the quarter ending June 30, we expect revenues between $220-222m, and this is on a consolidated basis both Infosys and Progeon. And for the year we are looking at between $946-963m for the financial year. Out of this, $930-945m is revenue from Infosys and $16-18m is the range for the revenue from Progeon. And based upon this, we expect consolidated earnings per ADS to be between 40 and 41 cents for the quarter ending June 30 and between $1.70 and $1.73 for the fiscal year ending March 31. Now this has been a very challenging year. We have had lot of challenges, both in terms of the world macro-economic situation. We had a certain amount of dislocation in the month of June and July because of the Indo-Pak crisis escalation. And recently we have had challenges and travel dislocations because of the war and the SARS phenomenon in Asia.

At the same time, we believe this is a year that offshore outsourcing has become mainstream and every company, which is are trying to reduce cost and still have quality and delivery time to market is looking at Infosys and the Infosys business model. Hence, even though the overall scenario has been pretty challenging, I think our industry has benefited from the trends in the marketplace. At the same time, the level of competitive intensity in our business has gone up, both from the India-based service providers as well as the incumbent IT companies in the West, now realizing that Global Delivery Model is the only way to go. And therefore, they are coming in, in a big way. And therefore, there is lot of competition in the market, and that in turn is leading to pricing pressures. So our customers on the one hand are getting very competitive bids and they are also keen to look at how their cost can be reduced because [audio gap] not doing well, and therefore we have had pricing pressure. And in the last year, our net margins, quarter-by-quarter, dropped from 30% in Q1 of the financial year to 25.4% in this in the fourth quarter of the financial year. Going forward, based on the estimates that we have given you; we have said that the earnings will be between 23.5-23.9% net-margins.

On next year's top line revenue, between $946-[953m]. We believe that we have built our financial model for the next year, which looks at all our revenues, which looks at all our pricing pressures, which looks at all our costs, and we have factored in the uncertainty in the marketplace. And after computing all this, we have published our guidance for the quarter and for the year. And as you all know, Infosys is absolutely committed to insuring that, when we give a guidance to the market, it's something that we have every intention of insuring that we meet. And therefore, I think we have chosen this guidance with a lot of thought, lot of analysis, and a lot of care. With this I will request my colleague, Kris Gopalakrishnan, to continue his comments on this quarter and this financial year, Kris.

Thanks Nandan. Utilization has been high -- 82% excluding trainees. And what makes this very attractive is that we have added 5,500 employees, gross, this year and in spite of adding so many employees, we have been able to keep the utilization so high. We have added the employees just in time, as the business requires. So we have been able to scale up the organization and make sure that it responds to the business needs as quickly as possible. Fixed price project year-on-year that is from financial year 2002 to financial 2003 has gone up to 36.7% of revenue from 31.6% of revenue.

Our effort on-site, off shore on an annual basis has gone up from 30.7% of total effort to 33.7. So on-site has actually gone up, and just looking at the fourth quarter, it's 34.3 and the third quarter it was 34, so probably starting to stabilize now. The client concentration is much more favorable to the company. the top client is 6.1% of revenue. We have one hundred fifteen $1m clients, forty-one $5m clients, sixteen $10m clients, nine $20m clients, three $30m clients, and two $40m clients. The last quarter, we had ninety-nine $1m clients. So, we have actually grown our existing accounts faster and we are able to leverage the different services that the company has to expand deeper into the clients. As the last quarter's revenue growth comprised of a volume growth of 12.8%, offset by a price decline of 5.1% and also the financial year 2003, we have had double-digit volume growth. So, our growths in accounts, existing accounts, addition of new accounts, etc., have been very good; in fact, we had 28 new clients added in the last quarter. Our clients were added across all the services -- all the vertical industries in which Infosys operates -- financial services, engineering and high technology, manufacturing, retail, some of the new verticals like life sciences and pharmaceuticals. Our banking group has done extremely well on top of a good financial year 2002. They have had a growth of about 50% -- over 50% in 2003 also. So they grew faster than the rest of the business.

Like I said, in the year we have added 5,500 gross employees. The net addition in the last quarter alone was 1,298 -- almost 1,300 employees. So we continue to grow the number of employees. Today the company is 15,356 employees long. Currently we have capacity for that is physical infrastructure capacity for 16,970 professionals. Again, we are able to add the required capacity just in time for the business or just ahead of the business needs, showing that the Company is able to scale up very well according to the business requirements, and our investments into capital, on infrastructure and things like that is just in time for the business requirement. Mohan.

Thank you Kris. In the fourth quarter, revenues grew sequentially by about 8% and gross profit grew by 3.7%. The reason for a slower growth in gross profit as compared to revenues was a fact that there was a pricing decline of approximately 5%. Operating income was at 3.8% consequently and net income was at 1.6%. We had a decline in the non-operating income of approximately 19.8% because the exchanged variation that is booked under this head was lower than the previous quarter. On a consolidated basis for the entire year, top line grew by about 38.3% from $545m-$753.81m, the gross profit by 33.6, and SG&A grew faster than the growth in the revenues; went up from 13.1% to 15.1% of our revenues. The reason is that S&M grew by about 2.8% higher considering the investment that we made in the higher number of client facing people, which enable us to grow faster for the current year.

Operating income for the full year was 29% as against 32.8; the net income at 25.9, as against 30.2; our balance sheet continues to be liquid. On a balance sheet putting $704m, we had $354m of cash. We spent $43m on CAPEX for the entire year and added about $143m to our cash balance. The cash balance went up from 210.49 to 354. If you look at our projections for the next year, we are projecting revenue between $935-949m, a growth of 26.5% and an EPS growth between 1.67-1.70, showing a growth of 14.8%. The liquidity continues to be strong. We have taken several steps to mitigate the pricing pressure. We have insured that the SG&A will not rise to the same extent in the next year and intend to bring it down as a percentage of revenue by making use of existing capacity in the sales organization. We will take steps to proactively cut costs, wherever applicable, to ensure that margin pressure is reduced. Over to you Gan.

I think we are ready to take some questions.

We will now begin the question and answer session. If you have a question, you will need to press the "1" on your touchtone phone. You will hear the acknowledgement that you have been placed in queue. If your question has been answered and if you wish to be removed from the queue, please press the "#" sign. Your questions will be queued in the order that they are received. If you are using a speakerphone, please pickup the handset before pressing the numbers. Once again, if there are any questions, please press the "1" on our touchtone phone. One moment please. We have George Price from Legg Mason along with a question. Please state your question.

Yes. Thank you. And I missed the very beginning of the call, so if you discussed this, my apologies. But I wonder if you could, sort of, break out in a little bit more detail the factors contributing to the margin pressure, obviously, there is the impact of sales and marketing rising ahead of revenues. There are also -- looks like there is about -- year over year and the quarter -- 250 basis points of gross margin pressure and [inside] price pressure. What was the negative price impact in the quarter and if that -- how much of that is coming from competitors, particularly the traditional US firms undercutting? Are you pricing versus clients -- just wanting to get a little bit more out of you guys?

I got some numbers for you. Let me take the year on year because that gives a much better secular trend. The price variance let to a drop in the gross margin by 1.4%. The InSite mix -- typically we make a greater percentage of gross margin on business offshore than InSite and this year we saw a 3% increase in InSite that lead to a negative gross margin impact of 2%, improvement utilization from 72.9% to 82.2% lead to an improvement in the gross margin by 1.2% due to reduced bench costs. Overall, the drop in gross margin for the year was some 46.2-44.7, was 1.6%. Our SG&A grew faster than rest of the business. It had an impact of 2.3%.

The reason was that the increase in number of clients facing people spent more money on the brands. Increase in number of client facing people are spending more money on the brand had an impact of 1.5%. The drop in operating margin thus was 3.5 consisting of increased spending on [Gelatin] marketing of 2.3% overall, net and drop in gross margin by 1.6%. Non-operating income came down by 0.2 because we made a provision of investment to the extent of 0.5% of revenues. If you take these three factors, net income came down from 30.2 to 26% that is 4.1%. I would like to ask my colleague, Basab, to speak about the impact of any US companies on pricing or how the pricing environment is there in the marketplace?

The question that you'd ask was what the impact on pricing due to competition, how does the domestic competition compared with global systems integrators and outsourcers. I'd say, at this stage, we are seeing most of our competition is from our traditional competition in India. But really the trend certainly is towards seeing more competition from global systems integrators like -- and global systems integrators and outsourcing companies. And that's really not the whole story because that is when we are competing for business. There are also situations where we are not sort of competing directly, but existing clients, as our business with them grows or as they feel that the market rates have dropped, they will try to renegotiate contracts with us. And even if they don't, sort of, openly do an [RSP] or bid it out, they will certainly come back to us and ask for a better price, and that also leads to lower prices.

Okay, so I guess, just to follow-up a little bit. Is there -- are the Global; you say trend is for more competition from the global systems integrators and outsourcers; do you see them gaining more attraction, gaining -- accelerating their penetration given that they're becoming more focused on offshore than say two or three quarters ago?

Yes more. But again I'd like to reiterate that most of our competition is still our traditional India-based competition.

Okay. And then, I guess, just looking [ball parking the] the guidance that you're giving, at least in US dollars for next year, obviously, the growth on the top line is slowing a little bit, but is still respectable. The earnings for ADS, you know, mid upper teen kind of year-over-year growth for fiscal '04; can you give a little bit more in terms of, you know, what is going to be impacting margins to have the earnings for ADS be so much lower than the top line, particularly if you're talking about being very focused on trimming SG&A or is that just going to be continuing pricing pressure and continuing expectations of competition?

First of all in fiscal 2003, we got a gross margin of 44.7%. We anticipate the gross margin to go down to 41.5 thereabouts. And the reason is that the average for the full year is higher than the gross margin for the fourth quarter. For the fourth quarter, the gross margin was [inaudible] because of pricing pressure and we've taken the prices in the fourth quarter and build the model. For example, in the fourth quarter, we had a gross profit of something like 43%. So you are seeing it decline from 43% in the fourth quarter to 41.5% for the entire year in 2004. We suffered a decline in prices in the fourth quarter. We have grown in revenues more than we anticipated because of growth in business from clients, who give a substantial amount of business, and who decided to ensure that they got the benefit of economies of scale.

If you look at SG&A, in the fourth quarter it was at 14.9% and for the full year, it is 14.8. We anticipated that it will go down by about 100 basis points, basically, because sales and marketing would be controlled very tightly. We have made substantial investments in fiscal 2003 and we have build a good team of people. We anticipate that we shall get the benefit of this investment in this current year and in the future years. So, there will be [audio gap] basis points to make up for this margin decline. The operating income last year was 29.2. We anticipate it will come down to something like 27 and odd percentage. The reason is that the gross margin has declined and we have made up a part of it to reduction SG&A. Non-operating income is 2.4% in the -- for the full year and for the last quarter, it was at 2.6%. For the next year, we have not anticipated any exchange differences that is any income that could arise because of any forward, say as the dollar, when you convert into Indian rupee.

Therefore the non-operating income is also coming down. At the operating income level, the decline we anticipated around 200 basis points. At the net income level, the decline we anticipate will be something like 250 basis points. Therefore, we will have about like you said, the mid teens growth in earnings around 1.69 to about 1.70.

Okay. Thank you. I will let some other folks get on the call.

Our next question comes from Cynthia Houlton from RBC Capital Markets. Please state your question.

Hi. Just wanted to go over, I know, its being a lot of time already talking about margins, but could you talk about wage increases and kind of what's happening on in terms of the competitive environment to hire the [right people]. Is it the increase in competitive and what type of wage increases can we anticipate, may be not just for the next 12 months, but kind of beyond that timeframe?

We do not anticipate any wage increase overseas that is onsite to India. Within India, we anticipate, we have moved on to a being a role based organization, we have mapped out people's roles in various branch and we had not promoted people for the last two years. We have decided to give people their due and therefore, promotions and salary hikes will be taking place in India only. Therefore, the impact of this wage hike will be one percentage point on the cost of sales. Cost of sales will grow up by one percentage point because of any wage hike. As we got wage pressure within India, at the entry level at the trainee level there is no wage pressure, in fact, the trainee costs would be coming down, but the middle level, the project manager level within three to five years of experience and may be three to seven years of experience, there is keen competition because the high growth levels the industry here and there is some wage pressure, but we anticipate that the total impact will be limited to 1% of revenue for the next 1-1.4% of revenues for the next year and the great part of this wage increase would be variable, depends on achievements of certain revenue targets, and this variability will ensure that we are protected in the downside.

Okay. And may be just as a quick follow up. Are you finding any increase behavior from competitors? I am trying to have a wake, kind of, more at the mid-level project level folks because that's exactly where we are hearing the more of the pressure is. Is it -- is there, you know, some kind of crazier activity as competitors trying to hire these people or why is it just kind of the natural course of business because the trends are good that these people, you know, deserve higher wage increases?

I understand the question. I understand the context in which the question is being asked. And I will say that there are around at this point of time around 250,000-270,000 software people in the software export industry located within India. So, already somebody there to come here and hire 1,000 and couple of 1,000, is not going have a material impact on the total wage sector. I think the whole industry can wage it out and it is not going to have a great impact, but I need to add that for the last five years, there has been a great demand for project managers, who have got, like I said three to five years or three to seven years experience, and in this area, I would personally anticipate for the next one or two years, there will some wage pressure, but this is something that is manageable. As far competitors hiding away our people, our attrition rate for this year, has been about 6.9%, the same as last year, and we noticed that people with experience of more than three years do not leave us as much as cost-belief people with lesser experience and even for people with lesser experience, people do leave us sometimes because they want to pursue higher education and not for many other reasons.

Thank you very much.

Our next question comes from Michael Brown (ph.) from Lobart. Please state your question.

Yes, the question is -- is the company where they are not able to continue to sustain their margins, but the valuation of the company will continue to contract and that is very, very important to their margins and their business plan reflect the change in pricing environment?

Well we have contemplated the change in pricing environment and put that into our model and we do believe that whatever could be anticipated based upon current trends, based upon current pricing, pricing trends, based upon the portfolio of appliance that we have and the rates that we charge has been input in the model. We are proactively taking steps to reduce cost wherever possible and get the benefit of the greater economies of scale. We have more than 15,000 people in India. We are also trying to reduce the impact of any declines in prices. By growing up the value chain, you will notice that in the fourth quarter our enterprise solution group has done extremely well, and in fact, they are at 14% of revenues, which is an all-time high. Coupled with consulting group of 3.9% approximately 18% of revenues in the fourth quarter came from high-end services like the enterprise solutions as well as consulting. It has mitigated to some extent the decline in the prices. But I would like to point out that we would continue to be profitable even at this price level. We would continue to have reasonably good margins and because we are at such levels that competitive pressure in the market for others will be far greater. So I think, one of the things possibly all of us need to look at is how well this kind of a pricing impact other place of market who do not have the same Global Delivery Model that we have.

Well -- just a follow-up. Is it my understanding that your forecast from March '04 is for approximately of 300 basis points decline in gross margin and only a 100 basis point decline in SG&A?

It's for a decline of 300 basis points in gross margin, which is reduced by a 100% decline in SG&A, yes. But the impact of the operating level will be approximately 200 basis points.

Thank you.

Our next question comes from Girish Pai from SSKI. Please state your question.

Yes, I was just wondering how much of your guidance is back-ended, like how much of a growth do you expect in the second half of the current year, in FY04? Because when I look at your first quarter guidance it's like almost flattish to, you know, a flattish growth at the batch level. So I was just wondering how much of it is back-ended?

You would have noticed that the first quarter growth target is 200 to -- I mean 220 to 222. So obviously more of the growth will come in the third and fourth quarter. The reason for it is like last year we see the business that is there. There has been a short-term impact because of the Iraq War and the scare was SARS in Southeast Asia. Because people have cut down travel and we are now ramping up to travel outside and make sure that the business flows up there. So the growth will come in the second half. In the first quarter as we have said it's going to be 220 to 222.

Yes, okay. And you know, you being giving one piece of statistic in the past that is project stock numbers, and I was wondering whether you have a number for the current in March quarter that's gone by? Or what's been the project stock number?

Q4 is 405. For the full year 1,460.

Okay.

And Q4 is 405.

Okay. Just one last question, what percentage in your revenues are project based, I know that you have a very high, you know, repeat business number. But in terms of project based revenues what would that constitute? [Inaudible]

All our -- almost all our revenue is project based, except for the product revenue; our product revenue is about 4.5%.

Okay, I am talking about non-maintenance related -- I suppose that would be like continuing all along but--? Okay. Fine thank you.

Our next question comes from Aniruddha Dange from CLSA. Please speak your questions.

Hi this is Aniruddha Dange from CLSA. Just slightly more on pricing would help if you could give some examples here, maybe without naming the client about how the price negotiations have gone through. I am just trying to understand how pricing has moved over the last quarter, because the last quarter is a fairly larger drop and how is it likely to move forward? What are the factors that maybe the client tries to put forward and what are the factors that you argue to maintain or increase prices?

Aniruddha, this is Basab. First, let me just explain how the impact of pricing manifests itself in the quarter. The two major impacts come from -- one of them comes from existing clients renegotiating rates down. The other comes from the clients that we have acquired in the past at lower than the average rates -- billing rates in the company, which expand their share of revenue in that quarter. So, you know they just way down the average billing rate for the company. So, I suppose you are referring to the first one, the way -- the reason why an existing client would enter into a renegotiation kind of discussion would be because they feel that what they are paying us and what they can get in the market for a similar value service -- you know the gap has widened to a level where they are not getting a good deal or they would think that they aren't. And since the market rates on the IT services have been dropping quite steeply in the last couple of years, it's just a matter of a certain account at a point in time deciding that it's now -- at that point in time, they should enter into a renegotiation because they think that they are not getting the best deal.

So, out of the 4% decline which has happened in the quarter, can you just give a ball-park -- very, very broad ball-park figure as to how much can be theoretically due to the first part and how much because of the second, because first is renegotiation, and second, because the lower revenue client ramping up?

Aniruddha, we have taken the price of the fourth quarter because -- not the average price of the year, because in the fourth quarter the price decline is always there, and we have assumed that decline in the prices for the next four quarters something.

No.

1%, what is that?

Yeah sorry, I would just want to understand, for the fourth quarter, how much the impact is because of the renegotiation and how much could it be because of the new clients coming in at lower rates?

We had about 87% repeat business in the fourth quarter. So quite obviously the impact in prices has come about substantially because of, you know, scaling up of existing customers and to a lesser degree by new customers.

Okay. Thank you.

Our next question comes from David Grossman from Thomas Weisel Partners. Please speak your question.

Good morning, couple of things. First, could you talk a little bit, maybe about the contexts of the deals that you are looking at? Are lot of the deals that you are looking at, outsourcing deals that are standalone, maintenance pieces or developing contracts or are you seeing a [trend] bundling a lot of these, particularly the maintenance deals with larger infrastructure outsourcing contracts?

Let me just rephrase the question or [read it] back to you. Your question is the kind of deals we are seeing, especially on the maintenance side, are they more standalone or are they broad-based going across the IT organization and larger in size? Is that your question?

While I guess I'm wondering are the deals that you're saying is a trend towards bundling the maintenance deals, particularly with larger, broader scale outsourcing agreements or has that really not changed to what you are seeing, pretty much standalone, large maintenance deals still being out of the marketplace.

No, what we're seeing is that there is a trend towards bundling a lot of maintenance ongoing support as well as the development work into a large package and putting out to bid at the same time instead of piece-mealing it. And this reflects the confidence of the market in the offshore outsourcing model, and they feel comfortable that the models tested proven and they don't need to test the waters before getting into the pool. Of course, the nature of these deals are different; the way they are bought and sold is different, this perception is different, and also pricing pressure is different. Since one company has put large bids out there, they expect that that leverage should bring them lower prices.

So is there a difference that you are seeing in terms of pricing pressure in the development business and the maintenance business?

Well, these large deals -- they will come with maintenance and development both bundled. And on that whole bundle, I mean they will expect flat lower pricing.

So how about a few [hiccups] of the businesses. Are you saying that difference in pricing pressure between the development business and the maintenance business?

Is your question that is there a difference between the pricing pressure on the development versus maintenance?

Correct.

Well, that's always been there and probably in this environment, it is a little more accentuated. Of course, the fact is that there isn't a whole lot of developmental business happening; that's become discretionary spend. There's not a whole lot happening, but clients tend to be less sensitive to rates on development than on maintenance.

So the vast majority of the pricing pressures that you are talking about right now relate to the maintenance business?

No, what I'm saying is that a lot of clients are now bundling both maintenance and development together and putting them out and expecting a flat lower rate for both of them.

I see. And perhaps, just a quick financial question follow-up. Mohan, you talked about your assumptions of gross profit and G&A and sales and marketing for next year. Could you perhaps just review those once again -- just what kind of margin range you're looking for on the gross profit line as well as G&A and sales and marketing as a percentage of revenue?

Yeah. For the last year, the average gross profit was -- just one minute.

Yeah,

The average gross margin was around 44.5% and for the next year, we assume that the gross margin may come down by about 300 basis points. And out of these 300 basis points, obviously the pricing plays a great role, and we have an increase in our employee cost by 1% of revenues offshore -- it's because of the promotion factor. Our SG&A expenses we expected to come down by about 100 basis points. We intend to keep our sales and marketing relatively flat compared to what was there in the fourth quarter so that we can get the benefits of the investment made in fiscal 2003. And of course, G&A could come down slightly. So a 300 basis point impact of the gross margins is offset by a 100 basis points savings on SG&A -- there could be -- we anticipated 200 basis point impact on the operating income which will come mostly because of the pricing pressure and, if you go down the line to net income -- we anticipate the net income could be impacted by around 250 basis points, because the non-operating income could be lower; we have not anticipated any exchange differences in our model that we have, which last year was around about -- last year was around 0.5%.

So, if you look at the whole model, you'll find 300 basis points decline in gross profit offset by a 100 basis points benefit in SG&A substantially for S&M, and operating income coming down by about 200 basis points for the whole year, and the bottom line is about 250 basis points because non-operating income could be lower. But, the non-operating income view is based upon what we see right now.

I see and one last question. Just, you didn't mention much about the BPO. I have heard I know it's relatively young but can you provide us with a quick update on what progress you've made there, what kind of revenue growth you've seen in the fourth quarter, and at least a snapshot of what your expectations are for fiscal '04?

I was waiting for this question. We have done about $2.2m of revenues in the fourth quarter. And we've earned $150,000 of net income. We've broken even on the BPO on just $2.2m of revenue. And for the full year, we did about $4.3m of revenue and had a net loss of $653,000, and these are substantially because of startup costs in the first three quarters. Going forward, we anticipate that the BPO business will do revenue of $16-18m for the whole year, and probably give us a net income or something like 10% of revenues. Right now, we have about 539 employees. We added 113 employees in the fourth quarter and we have pipeline. The pipeline looks very strong. There have been a tremendous amount of inquiries, tremendous number of [RFPs] has been attended too and we are very enthusiastic about this business going forward, and we see strong growth in this business.

Can you just give us a quick sense of the type of business you see in the pipeline, the nature of the functions that you're performing?

Well, what we have in the pipeline is basically a lot of [RFPs] out there in the financial services area, in the back office of a bank, in the back office of security organizations, in the back office of insurance companies, and even they work for technology companies, particularly in the areas of sales accounting, accounts payable, etc. Now these are areas where people have decided to go into outsourcing in a pretty big way. The inquiries for the sales cycles are quite long, sometimes six to nine months and the enquiries have been quite strong. Well, I could say that we will be adding onto our clients next year in a bigger way, hopefully, than what we'd done in the first year of our operation.

Okay. Great. Thank you.

Thank you very much.

Our next question comes from Michael Dillon (ph) from RP Research. Please state your question.

Hi. I was just wondering two questions; first one was -- what percentage of your overall revenues comes from prime contracting relationship versus subcontracting. And the second question -- you talked about 34.3% onsite stock; where do you see that turning to [’04] make your guidance?

On the -- this is Basab. I will just answer the prime-contracting question. Almost all our business on the services side is prime contracting. Subcontracting is very minimal and it would certainly be below 5%.

Regarding the InSite offshore ratio. I think in the last quarter and this quarter, there is a shift of about 0.3%. We are focused on moving more and more of our cost growth. We have stabilized this and stabilized the InSite offshore ratio in an environment where consulting as well as package implementation kind of services are going up. We need to actually grow those services because those are high value added services and which allow us to give better visibility into the client. So, even then we have been able to contain or manage the InSite offshore ratio and we'll continue to focus on managing the ratio.

I'm sorry, just in order to make guidance [for ‘04], where do you see that 34.3 trending to? Like what's your assumption in your model?

At this time, I don't see a material change. The average we are assumed for next year is 32%.

32?

Yes, that's the overall year average.

And, just to come back to the sub-contracting question, 5% is prime in the services business and in the rest of the businesses; is that all sub-contracting, the [inaudible]?

No, what we said was 95-98% of our business is prime. Our relationship is directly with the customers, and probably less than 5% would be about 2-3% is where we are sub-contracting.

Okay, thank you.

Your next question comes form Ashish Kumar from Credit Suisse First Boston. Please state your question.

Thanks you so much, good evening Sir. I think both in the morning India time and again too, right now, management highlighted two things -- one is that their is uncertainty, and second that no matter -- almost implying that no we'll definitely meet the numbers; clearly there is much more uncertainty on macro-economy now than has been ever in the past. Could you broadly tell us what are your assumptions that you are making either on macro-economy or client ramp-up etc. when you have given this guidance - that's my first question?

I'll answer the general trends in IT related to the macroeconomic situation. Our assumption is that in the largest market for IT services, which is the United States, that the trends will be recessionary for the current year as well and that IT spends will be flat to down and I'll hand it over to Mohan for the rest of the question.

We have not anticipated or built in any uptake in the economy into our model nor there've been any, let us say, pricing forward available to the industry as such. And we have not anticipated any situation which is what's of and what we are right now, because if there is any economic condition which is unanticipated which becomes much worse, that we think is a market risk. We try to build-in from our knowledge what is available today. We are not being optimistic; we have taken a very realistic view of economic circumstances.

Sure, and just a follow up question. Usually when you do a scenario building exercise, we typically get a normal curve, such an optimistic outlook, you know very pessimistic and I presume you have either given conservative or realistic outlook. We just had a broad level -- is this is the range quite type, is it like a just a single digit percentage points, or it's quite a wide so if the economy has really improved in the second quarter - I am sorry in the second half, we could see a meaningful upside and vice-versa?

I think, we can't really say what all these things but we can say one thing that we have constructed a model where, as Mohan mentioned, we are assuming continued economy being in the same shape, pricing pressure is built into the model, and competitive intensity is built into the model. The model that we have and the numbers that we have given you is something that we have every intention of meeting. As you know, we have a track record of meeting all our statements on estimates with the future. And therefore the model is such that we have every intension of unequivocally of meeting what you have said in the model.

Sure Sir, thank you.

Our next question comes from Perry Quinn (ph) from Cameron Capital. Please state your question.

Yes good morning. Just to back for clarification. Did I understand that the pricing pressure is greater on the development side than on the applications maintenance side?

No, what I said was that typically development activity attracts less pricing pressure. However, we are talking about trends. A trend in the market is that companies are bundling development maintenance and other IT-related activities going across the organization and not piece-mealing it and putting it all out to bit, which really attracts -- which basically attracts more pricing pressure because of the large volume involved in the leverage that it gives to the client. So, I mean, even to look at this whole -- the [pack] is development maintenance, re-engineering, the whole area of application management is what they would put out to bit.

It's okay.

And they expect a flat low rate for everything.

So, because the whole size of the deal the contracts had become larger because they now represent more dollars that's what creating the pricing pressure for the most part?

Yes.

Okay. Secondly, when you look at -- if I understood correctly you were saying that most of the competition you were still seeing was coming from other your competitors in India if you will more so than the larger company such as [Excensor]. Even though they have talked about going offshore that currently it still coming mostly from your competitors in India?

That is correct.

Okay. And lastly if you could just clarify one further thing on the pricing. Do you breakout or could you breakout what the difference is in pricing offshore versus onshore for you just in terms of your average billing rates?

Yes. Let me give the pricing declines onshore and offshore. In the fourth quarter, our annual per capita revenues onsite were $130,500 and also a $54,600. I would like to point out one single fact and that is in the fourth quarter of last year the fiscal 2002 the onsite was 133,900, offshore 55,600. If we take fourth quarter of fiscal 2002 to fourth quarter of fiscal 2003, the decline in onsite has been 2.5%, decline in offshore has been 1.8% on a blended basis because onsite has gone up in a ratio has been a positive [0.] but fourth quarter is lesser than the earlier three quarters because in second and third quarter the prices went up because of mix. We have taken the fourth quarter rates and built a model from there because the average for the full year is at 133,900 and 56,300.

Okay. And if you look at the renegotiation of contracts by existing customers, just in the way you are contracting is that something that you allow on annual basis? Is it at the conclusion of the contract? How often and when does the customer have the ability to renegotiate price?

Most of our contracts are structured in a way that the client can open up contract for renegotiations in the middle of the term.

Okay. So, there is now event, for example, another piece of business coming on and becoming available for you to bid on that creates that opportunity to renegotiate price of your contracts?

Can you repeat the question, please?

My question is, is it really just the matter of them opening up the discussion or is there is piece of business that normally surfaces that creates that discussion?

Well, it has to be substantial enough for them to have some leverage to have a discussion. There has to be some competitive intensity and the difference between our existing rates there and what they think they can get in the market has to be also substantial. In general, there are serious exit barriers, you know if we have a large enough relationship that prevents them from just doing -- being so willful about the renegotiation. So, there are lot of factors that play into this including how sticky the relationship is, how well we have done in the past, the length of this relationship. So, there are lot of factors that play into this.

Well, given the pricing pressure that you saw a pricing pressure, you saw in this last quarter, were the customers responding to competitors coming in with more competitive pricing or were you responding to customers coming to you and saying we have this larger piece of business, and we expect in order for you to get that that you have to pay before we are going to built at a lower rate.

Both

One more than the other? Was it one more than the other or this is the normal balance?

Yeah, normal balance. I mean some companies talked about doing more business with us in the coming year, and therefore, what could they expect. Other companies talked about, you know, that is this comparative or that comparative. This is, you know, the rates available in the market maybe different from the rates we were charging in. So, it's both kinds.

Okay, and one last question. I apologize for dominating this. Is that -- you mentioned that they were customers that came in at very low rates, but then increased business with you, your percentage of revenues that you were generating from that and that was one of the things it was creating margin pressure. Under what a circumstance is one of these customers to come in and will say below normal billing rates?

You know, what I said was below average rates. If a client arise that we have booked in expectation of large book of business and we've given them below average rates. If the share of that client’s revenue in our total portfolio increases it pulls down the total average.

Can you get those; will be typically very large customers with an opportunity for you to expand business with that customer, correct?

Correct.

Okay, thank you very much.

Okay [Alfa] I think we'll take one last question and then sign off.

Thank you. Our last question comes from Jim Crawford (ph) from Zimmer Lucas Partners. Please speak your question.

Hi. Does the new guidance of a $1.70 assume that the competitive pricing pressures are essentially slowing down or leveling off to some extent or possibly increasing?

Yeah. The pricing pressure is going to continue. I don't see any reason why it should trend up or down, but again, you know, it's a complex thing to say how it will impact actually our average rates, this kind of hard because what we are looking at is a set of clients, which, you know, our revenue mix which -- with revenues which are small to large and at the rates are at different levels. So, the -- in general the trend in the market is going to be that in the market, the rates are going to continue to decline because there is an over supply in the market. So that's the only trend that I can positively say, I don't see how it will impact us in one way or the other.

And how much of your new guidance is coming from managing your expenses?

We all assume that decline of 100 basis points in SG&A expenses.

Okay. And finally, are you guys going to be issuing some additional ADR's into the U.S. in the near time I have been hearing something to that effect?

We have files before the SEC for an ADR issue, a secondary offering, and you know the status is exactly better at this point of time.

Okay, great, that should sort of reduce the disparity between the ordinaries and these ADR's that we have over here. Okay, thank you gentleman.

Okay, thank you. Thank you [Alfa]. Thank you ladies and gentlemen for joining us on this call. As always the replay will be available an hour after this call. Replay will also be available on our website. Transcript will be available within the next 2-3 days on our website and available at the numbers mentioned in our press release in case, you have any questions and we look forward to speaking with you at the end of our next quarter. Thank you and have a great day.

Thank you ladies and gentlemen. This concludes the conference for today. Thank you for participating. You may now disconnect.