Infosys Ltd (INFY) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. I'm Rita, the moderator for this conference. Welcome to the Infosys first quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to hand over the floor to Mr. Shekar. Thank you and over to you, sir.

Thanks, Rita. Good afternoon, ladies and gentlemen. I am Shekar from the investor relations team in Bangalore. We thank you all for joining us today to discuss the financial results for the quarter ended June 30, 2007. Joining us today in this conference room is CEO and Managing Director Mr. S. Gopalakrishnan, COO Mr. S. D. Shibulal and CFO Mr. V. Balakrishnan, along with other members of senior management. We will start with a brief statement on the performance of the Company during the quarter ended June 30, 2007, outlook for the quarter ending September 30, 2007 and year ending March 31, 2008. After that, we will open up the discussion for questions and answers.

Before I hand over to Infosys management, I would like to remind you that anything we say which refers to our outlook for the future is a forward-looking statement and must be read in conjunction with the risks that the Company faces. The full statement and explanation of these risks is available with our filings with the SEC, which can be found on www.sec.gov. I would now pass it on to Infosys management.

Thank you, Shekar, and good afternoon, good morning, good evening to every one of you. Welcome to this analysts' conference at the end of quarter one financial year 2007/2008. Our income for the quarter was INR3,773 crores, which is a year on year growth of 25.1%, and the net profit after tax was INR1,079 crores for the quarter, year on year it was growth of 34.5%. If you exclude the tax reversal, then the growth -- you have to reduce INR51 crores and the earnings per share will -- from INR18.89, will be INR18 per share, which is a year on year growth of 25.3%.

In this quarter, the rupee has appreciated by about 7%. At the beginning of the quarter, rupee was around -- the exchange rate was 43.1 and at the end of the quarter it was 40.58. So the average rate from last quarter to this quarter has gone from 43.75 to 40.66. Because of this, we have lost revenue of INR287 crores, so that's reflected in our income as well our guidance for the rest of the year. But if you look at the guidance in U.S. GAAP, we are revising it upwards to 29% to 31% from before, which was 28% to 30%. Our guidance in U.S. dollar terms, in that sense, is growing.

So let me give you a feel for what we're seeing in the market. We have had strong volume growth. Our volume growth is 6.9% sequentially. Our utilization has gone up to 75% from 73.7%. We have seen growth in U.S., 7.5% sequential growth, in Europe, 8.4%. We have seen growth in specific services. We have seen growth in certain verticals like BFSI, telecom, retail, manufacturing, transportation and logistics, energy and utilities. So we are seeing broad growth in geography, services, in industry segments. And if you look at our clients also, we are seeing that clients are also growing. We added 35 new clients and we have seen growth in the clients.

Mr. Shibulal will give you more color on this, but, broadly, for companies like Infosys which -- that can provide a broad range of services, that can scale up a relationship very quickly, that can bid for large outsourcing deals, we feel that the market is good. We are not seeing any concern about any particular region or any particular economy at this point. And we believe that, for companies like Infosys, the environment is favorable and that's reflected in our growth rate.

We have added 7,000 employees in gross this quarter and, net, 3,730 employees. For the year, we are looking at 26,000 employees, rather than 24,500 which we announced at the beginning of the quarter. And for Q2, we will see 11,700 employees gross level being added. So clearly, the environment is positive for a company like Infosys. Now, I'll request Mr. Shibulal, COO, to give you more details about the segmentation.

Thank you, Kris. This is Shibulal. I will start with the geographical segmentation. Our U.S. revenue has remained stable, 62.6% this quarter. European revenue has marginally gone up, 26.8% compared with 26.6% last quarter. The rest of the world revenue has gone down a little bit, 9.3% to 8.8%. So this is very much in line with our investment strategy. We have been investing in Europe over the last many years and we are seeing growth in Europe ahead of the rest of the market.

Our development revenue and maintenance revenue together has remained stable. Whereas the revenue from development has come down this quarter, but on an LTM basis, there isn't much of a difference. Our revenue from consulting has gone up by about 22% quarter on quarter. It is now 4.9%, compared with 4.3% last quarter. Testing has gone up by 11% this quarter. It is 7.5% compared with 7.3% last quarter. Package implementation has remained stable, 18.4%. Now, in summary actually, from the new services which we have introduced over the last five years, we derive about 44% of revenue. Our revenue from the products is 3.2%.

If you look at the verticals, our banking and capital markets segment grew by 5%. As a percentage of revenue, it is 36.1% this quarter. Manufacturing grew by 13% and it is 13.6% of our revenue this quarter. Retail has remained -- also grew by 7.8%, as a percentage of revenue, 10.8%. Telecom grew by 8.2% and also we have seen good growth in service segment, which is actually 7.6% of our total revenue this quarter.

Fixed price versus time and materials. Fixed price has gone up this quarter, 29.1%. It was 27.4% last quarter. Our onsite percentage has remained stable, marginally come down. It was 32.8% last quarter. It is 32.6% this quarter. Our per capita revenue, there is improvement this quarter. We have seen an improvement of 1.4% on onsite revenue productivity and 1% on offshore revenue productivity. This has given us an increase of 1% in our blended revenue productivity quarter on quarter.

Client profiling. We added 35 new clients this quarter. Our total number of clients now stands at 509. Number of clients giving us more than $1m -- $1m or more than $1m has gone up to 285. Number of $5m clients has reached 113. Number of $80m clients, clients who are giving us $80m or above, actually doubled this quarter from last quarter. Last quarter, it was 4. This quarter, it is 8. We have one client giving us $200m plus on an LTM basis. Our largest client accounts for 8.6% of our revenue, the top five 21.4% and top 10 32.3%.

Our repeat business this quarter is 99.5%. This is very much in line with the seasonality of this, of the repeat business. In Q1, it is generally high, because it's computed based on the customers who have been our customers last year.

Our utilization has gone up. Our utilization excluding trainees this quarter is 75.1%. It was 73.7% last quarter. We have added 7,000 employees gross, 3,730 net, this quarter. With that, let me now pass on to Bala to talk about the financial performance.

Good afternoon, everybody. It's Bala here. This quarter has been an excellent quarter for Infosys. The revenues grew 7.5% in U.S. dollar terms sequentially. Rupee had a dampening impact on the revenue growth in rupee terms. We had around INR3,773 crores of revenue. Last quarter, the average rupee dollar rate was 43.75. This quarter, it's 40.66. So we lost around INR287 crores in top line because of rupee appreciation and [hopefully] for the whole year it could be more than INR1,000 crores.

So rupee had a big impact on operating margin. The operating margin went down by 3% this quarter, mainly because of rupee. Rupee appreciated by 7% against dollar, which impacted the margin by 3.5%. And we had a wage increase and visa costs coming up in the first quarter that impacted on margin by another 3.5%. So overall, we had a headwind impact due to visas, wages and rupee of something around 7%.

Where the utilization went up by 3% during the quarter, that had a favorable impact of 150 basis points on the margin. The pricing went up by 1%. That added another 100 basis points positive impact on the margin. We have the losses of the subsidiary coming down and also some scale benefits, adding up to another 150 basis points positive impact on the margin.

So net net, we had a 7% impact because of wages, currency and visas, offset by higher utilization, pricing and scale benefits, plus the subsidiary losses coming down. And the net impact on operating margin was 3%.

The effective tax rate remained at the same level. It's around 12%, 13%. You have to exclude the one-time tax reversal. We had a one-time tax reversal of INR51 crores, because the limitation period [on one of the wholesale jurisdictions] has expired, so we would reverse that tax provision.

The non-operating income has been high during the quarter. It's around INR253 crores. We had around $18m coming out from our hedging. We have around $925m of ForEx cover as of June end. It was $470m in March. So the hedging benefit has come on the non-operating side. It's around $18m. The effective yield on our portfolio of investments went up to something around 11% in the last quarter. That added up to the non-operating income. Going forward, we believe that the effective interest rate could come down to 9% in the next three quarters.

So overall, when we started the quarter, we gave a guidance of INR17.84 in EPS. We ended at INR18, excluding the tax reversal. And if we include the tax reversal, it will be INR18.89. So in spite of the currency, in spite of the wages, in spite of the visa costs, we were able to maintain the net margin for the quarter and we were able to exceed the rupee guidance we gave in the beginning of the quarter when the rupee was 43.10.

The rupee ended the quarter at 40.58. That is the rate we use for our guidance for next three quarters. For the full year, we are talking about revenue guidance of 17% to 18% growth in rupee terms and EPS growth of 16% to 17%. There was a dilution last year at the end of the year, because we were getting into a new accretive regime. The dilution impact itself has impacted the growth of EPS by around 3% for the full year and 1.5% for the last quarter. So the guidance for the full year of 16% to 17% growth in EPS has factored in the rupee, factored in the dilution and also has factored in direct costs.

In our guidance, we have not assumed any large deals. We assume the pricing to be constant at the level we saw in the first quarter. In the first quarter, we saw the pricing going up by 1%. For the next three quarters, we are assuming that pricing will remain at the same level as we saw in the first quarter.

We are also seeing increased momentum in the business. That's why we are increasing the hiring number for the full year. In April, we said we'll hire 24,500 employees. Now, we are saying we'll hire around 26,000 employees.

Now, overall, we are seeing good momentum in the business. We are seeing good volume growth. The guidance is a snapshot of what we see at this particular point of time. So we increase the overall guidance in dollar terms by, by around 30% to 31% from 28% to [30%] what we guided in April, but going forward we have to see how the whole thing's going to move. We believe the environment is very strong. The volume growth continues to be strong and we believe that for offshore players like us, as you know, market opportunity available for growth.

With this, I conclude my presentation. Now, we can open the floor for questions and answers. Thank you.

Thank you very much, sir. I would now like to hand over the proceedings to the international moderator to conduct the Q&A session for participants connected to the international bridge. After this, we will have a question and answer session for participants connected to India. Thank you and over to you, Salvia. (OPERATOR INSTRUCTIONS). The first question from Miss Kanchana from Pacific Crest.

Hi. I had a question with respect to the fiscal '08 guidance in terms of U.S. GAAP. You have increased your revenue guidance by 1%. You've already seen increase in productivity improvements by 1% and you're increasing the headcount guidance by 1,500, so help me understand the discrepancy. I would have expected a little more increase in the revenue guidance. I was wondering if you could speak a little bit about it.

The revenue guidance is a snapshot based on our current visibility. Based on factual information of what our clients are willing to commit, budget etc., we give a guidance. That is why we talk about what the environment is, how broad the growth opportunities are today in terms of region, in terms of services, in terms of industry segments, to give you a much better feel for the growth. However, the guidance itself is based on a model which we have, facts we have today, the visibility we have and things like that. But the environment is positive. We have increased the guidance based on what we know today, for the rest of the year.

Okay. So if I were to ask you the question a little differently, I guess if you were to compare '07 right now, where you're looking at the demand environment, and compare that to last year the same timeframe, are you seeing the same healthy demand, or is it slowing down at this point, or is it actually increasing at this point? I was wondering if I could get a sense from you.

It is, it's around the same. It is robust, it is broad, it is across all industries and regions. And our ability to handle complex assignments, complex projects, has increased, actually, as the year on -- As each year goes by, our capabilities increase, the number of employees we have, our consulting capabilities etc. increase. So both from a transformational perspective as well as large outsourcing deal perspective and ability to handle complex relationships, I think our capabilities today are better than ever before in that sense.

Okay. And one last question. I guess if I were to look at your per capita revenue onsite and offshore, it's great that we are seeing an increasing trend, but is there a reason that for this quarter it's actually slightly lower than what we saw in the March quarter and the December quarter on a sequential basis?

The last full year number was about 5%. This quarter, it's 1%. So the trend continues. For the last five quarters, we have seen increased revenue productivity. That trend continues.

Okay. Thank you.

Thank you, ma'am. Next on line, Mr. [Joseph Faresi] from [Janney].

Hi, guys. I wonder if Bala could just run through or break down other income for us again.

Yes, sure. The rupee appreciated by 7% during the quarter, so it impacted our operating margin by 3.5%. The wage increase which we announced in April, of 13% to 15% increase in offshore and 5% to 6% onsite, has impacted the margin by 2.5%. Visa costs impacted the margin by 1%. So overall, we had an impact of 7% on operating margin because of all these three.

We had utilization moving up by three percentage points, which had a favorable impact on the margin of 150 basis points. Pricing increased by 1 percentage point -- sorry, 100 basis points. That impacted the margin favorably by 100 basis points. And we had the losses in subsidiary coming down during the quarter and also some scale benefits, which together added around 150 basis points favorably to the margin.

So net net, we had a 700 basis point impact because of rupee, wages and visas, which was offset by utilization, pricing and subsidiary losses coming down plus some scale benefits of around 4%. So net impact on operating margin, it's around 3%. But if you look at the non-operating side we had foreign currency income of something around $18m, which came mainly because of the hedging positions we have. So that favorably impacted the margin at a net level. So net margin level, we're able to maintain the margin similar to last quarter.

Okay. And I wonder if you guys could just give us a little bit of color on what you're seeing going on in North America. Thanks, guys.

North America continues to be a strong market for us. In this quarter, we saw 7.5% sequential growth in U.S. We are seeing growth in financial services. We are growing -- seeing growth in retail, in manufacturing, transportation logistics, energy and utilities and telecom, so broad growth. The difference is really North America, we're seeing more transformation kind of deals, in Europe more outsourcing kind of deals. So consulting-led transformation kind of deals are where we are seeing larger opportunities today. And we're positioned well because of our consulting group, to take advantage of this.

Okay. Thanks, guys.

Thank you, sir. Next on line, Mr. Andrew Steinerman of Bear.

Hi and good evening. Bala, could you go over again what the net pricing realization was in the quarter? And why, in the guidance, are you assuming that pricing stays at the levels of the quarter just reported? Does pricing continue to bias upwards?

No, we are seeing the pricing going up by 1 percentage point on a quarter to quarter basis. It went up by 1.4% on onsite and 1% offshore. On a blended basis, it went up by 1%. For the next three quarters, we are keeping the pricing at the same level in the guidance, similar to what we saw in the first quarter. So the next three quarters' numbers have factored in the 1% price increase we saw in the first quarter. We are not factoring in any additional price increase in the guidance.

Right. And so my question, Bala, is why do you do that? Is pricing continuing to bias upwards or is there something that you're seeing in your pricing that suggests that it's not going to continue to go upwards over the next three quarters?

We give guidance based on what we know at the particular point of time. Even in the start of the year, when we gave a guidance, we assumed the pricing to remain at the same level as the fourth quarter of last year. So we can give guidance only based on what we know at a particular point of time. We cannot assume certain price increase which may come in the future currently.

Right, so the pricing environment is still favourable?

It is positive. We have seen four or five quarters of upward increase. All we are saying is that we don't want to assume that in our model at this point, given that pricing is something which the client has to agree. And it also depends on the wage negotiations and things like that, which service grows, which customer grows, etc. So it is a much more complex -- the impact of that pricing on to the revenue per employee, revenue productivity, is much more complex. And so, to simplify, we have assumed in our guidance that it is flat.

I understand. It's more of a model assumption than any change that you see in the environment. Thank you very much.

Thank you, sir. Next on line, Mr. Bhuvnesh Singh of Credit Suisse.

Hi, there. Congratulations on decent numbers. I had two questions, first on your hiring. Last couple of quarters, your hiring number per quarter has been somewhat lackluster. Any particular reason behind that?

Wait for this quarter. 10,000 people this quarter.

Okay. That's one. And what was your net hiring target for the full year?

Gross is 26,000. We don't talk net, because we can't estimate. So gross will be 26,000, up from 24,500 at the beginning of the first quarter.

Okay. And any particular reason why the hiring has been bunched in one quarter, in 2Q this time? Is it all because of campus hiring or some other reason?

Well, campus hiring usually comes the end of first quarter and second quarter and we wanted them to be trained in Mysore. Mysore, our projects in the [hostels] are delayed by three months, so we couldn't get enough place to accommodate them, very prosaic reasons. And today, for example, the cement shortage in India. There is a shortage of construction labor. So all construction projects are behind schedule [in India]. So we also suffered as cement prices have gone up and there is shortage of cement. There's a big challenge there. So we could not accommodate them so they're all joining in the first week of July.

Okay, okay, and thanks. And Kris, second question for you, sir. In terms of your contract renegotiations, when you are going to your customers now and renegotiating contracts, are you still -- like earlier it was assumed you have some margin targets for contract renegotiations. Are you still maintaining your margin targets on the renegotiations or, given the current rupee/dollar rate, are the margin targets somewhat shifting?

So this is Shibulal. Our pricing remains stable with and upward bias. We are renegotiating contracts. Our new contracts also are getting negotiated at around 2% to 4% higher than our average. And the new contracts maybe 3% to 4% and existing contracts maybe 2% to 3% [above] the average. And that is what is flowing into the revenue productivity. At the same time, as the customers get larger and larger, there are discounts in the contracts which will kick in.

Okay, so --

From a margin perspective, our target for our business units etc. are to shoot for certain ranges which we have given them and, depending on the size etc., we look at discounts. But basically nothing much has changed. As we go along -- the rupee has appreciated in just one quarter.

Yes.

7% in one quarter. As we go along, we see that the environment is such that the prices really go up. That is the environment in which we are operating today, also because the costs are going up. So we'll see how it goes along.

Do you think that when you go to the customer and say that, 'we are providing you so much value and, now, that value comes at a higher price because of rupee dollar', are they sympathetic to your situation? Are they willing to consider some sort of pricing increase just because of the cost increase on the back of rupee dollar?

No, you have to talk about costs in general, because then what happens is if the rupee depreciates they'll start asking for money back, right? So you have to look at factors which seem reasonable to clients. Of course, if the rupee appreciates substantially and continues to be like that, then we may be able to look at some [revision] and things like that. But generally, the negotiations are based on [compensation] costs or overall costs and things like investments we are making in improving our services, solutions, the value addition] we are giving to our clients, etc.

Okay. Thanks. I really appreciate your time.

Thank you, sir. At this moment, there are no further questions from participants at international. (OPERZATOR INSTRUCTIONS). We will now begin the question and answer session for participants connected to India bridge. (OPERATOR INSTRUCTIONS). First in line, we have Mr. [Sandeep Shah] from [IXIS Securities]. Over to you, sir.

Yes. Can you throw some light in terms of billing rate improvement and the volume growth within the top five clients?

No, I don't want to get into details of top one client, top five clients, etc., especially pricing, etc.

But is there --

The top 10 clients grew by 3.9% and then next another -- not top 10 global 9.3%. So that figure we like to talk about.

But are you witnessing a billing rate increase within the top five clients also?

No, I don't want to be more specific. They say in Delhi that in new contracts we're seeing 3% to 4% and in existing contracts 2% to 3%. Generally some of the contracts we are able to get some price increases as and when the contracts come up for renewal. I don't want to be very specific.

Okay. And your top six to 10 clients in dollar terms has [grown] by 3.1%. So is there something to read about --

No, not really. I think there will be some shifts happening quarter upon quarter. So there is nothing particular. Generally we are seeing that there is buoyancy in our clients in the market for our kind of services, for our kind of capabilities.

And are there more additional value levers which we have not counted in this current guidance [40.5], but any additional rupee appreciation beyond 40.5?

Well, Bala talked about the price increase which he has not factored into the model. Our utilization today is 75%. Typically we can look at a utilization of high 70s, low 80s. And then we continuously play around with regions. For example, rupee has not appreciated as much with pound sterling or with euro as much as with the dollar. So that's one thing we can look at.

So there are several things which we have not factored in because these are things which we do proactively. But you have to wait for the market to respond. And that's why some of these things are not factored in. We still have multiple levers which we can pull to continue to improve the margins and things like that.

Of course, our investments also get adjusted based on the money we have. So that's also another lever which we have.

So that means that some of the clients who are in the U.S. or the North America can be billed in the non-U.S. dollar currency? That's what you mean to say?

Typically -- no, typically clients would like to get billed on their local currency. So I don't know whether we -- it's a good suggestion, we can look at it. I don't know whether North American clients would like to be billed in euros or something. We can try.

It's Bala here. Most of the customers don't want to take the currency risk. So we have to manage the currency risk. I don't think customers want to take the risk.

Okay. Okay. And just to understand the sales and marketing expenses has gone down, I believe the commission and the brand building expenses has gone down significantly quarter on quarter. But at the same time our sales and support staff has gone up. So I wonder how one should look at it in terms of trend in this expenses.

So I know it's primarily due to the reduction in losses in consulting really, nothing other than that.

Okay. Okay. Thanks and all the best.

Thanks.

Thank you very much, sir. Next in line, we have Miss Divya Nagarajan from Motilal Oswal. Over to you, ma'am.

Hi. Congrats on the numbers. I'm just curious for your explanation on the assumptions for next quarter about guidance please. Could you just give that?

It is similar to the assumption I spoke for the next three quarters, the same assumption.

And the dilution that is factored here?

Pardon?

You also spoke about the equity dilution that is factored in this.

Yes, that is factored in the guidance, yes.

Thanks. I'll come [off on] this later.

Thank you very much, ma'am. Next in line we have [Mr. Surinder] from Citigroup. Over to you, sir.

Yes. Good afternoon. My question is for Bala. Some simple questions as the calculations suggest that your revenue guidance for next nine months is flat compared to what it was -- in almost flat compared to what it was in [the period]. Considering that revenue per employee is already better by 1% and there are three new deals which were not factored in earlier, does it mean that your model is now factoring in lower volumes for next three quarters compared to what you were factoring in April?

Look, we have given a guidance based on what we see on a normal revenue basis in April. Now, when you look at the actual numbers, in the first quarter the pricing went up by 1%. So the incremental growth is fine the first two quarters, it may be due to pricing, it may be due to volume. Both have been factored in, in the revised yearly guidance.

Guidance is a snapshot at a particular point in time. And things move when gradually when you progress through the year. So you should not read too much into that. What you say is right. We have seen a 1% pricing increase and that has reflected in the 1% increase in the overall yearly guidance we have given in terms of dollars.

But pricing is something which you don't assume that comes. And the yearly number is a snapshot at a particular point of time.

Yes, Bala, but do you get this quarter guidance by 2.5%? And, on top of it, there is a revenue per employee which has to be factored in. That's what I was trying to understand from a volume perspective. Is there something that we should be reading into this or is it just, as you said, a snapshot or possibly maybe use the usual conservative way in which [it could] impact?

No. I think what you should focus on is other factors. We have utilization of 75%. That means we have enough capacity in the system to take on any opportunities in the marketplace. We are increasing our hiring target by 1,200 people for the whole year. So those are indicators you should look at. Guidance is a snapshot at a particular point of time.

Okay. But all those indicators seem to suggest something about, look, which is better than your guidance. So is that a correct enough reading?

I am not saying anything. We have given a guidance. And what I am saying is we have a model which is well prepared to take on any additional growth opportunities in the market if we (inaudible).

Okay. Thanks a lot.

Thank you very much, sir. Next in line, we have [Mr. Rushi] from [Network Stockbroking]. Over to you, sir.

Good afternoon. I -- my question is generally around utilization that you mentioned. You mentioned you can maintain high utilization, high 70s utilization for going forward. Most of the pressure that was supposed to have come in the June quarter deferred towards July. I want to know if that will have an impact on the utilization in the second and third quarter, and would you be still comfortable of maintaining high 70s utilization?

So there are two kinds of utilization, including trainees and excluding trainees. When I talked about utilization being comfortable at high 70s, low 80s, it is excluding trainees. Including trainees, utilization could vary depending on the time in which the trainees do join us.

Right now, the excluding trainee utilization is 75%, 75.1%. And including trainee utilization, it's 71.2%. So the 75%, 75.1% is excluding trainee utilization. We have scope for improvement.

Could you quantify, say, in terms of what kind of improvement could it be as good as 2%, 2% on utilization front?

So we are comfortable with high 70s utilization. High 70s. And even low 80s, we have seen that in the past.

Right. Thank you, sir.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Next in line we have Miss Mitali Ghosh from DSP Merrill Lynch. Over to you, ma'am.

Yes. Hi. Good afternoon. Congratulations on good execution in the first quarter. On this quarter I just wanted to understand on the decline in the top six to 10 revenues from the top six to 10 clients. If you could just give some color on is it because of additions from a particular client and what is the outlook for this client going ahead?

Mitali, it's Kris here. It's just seasonality. There is nothing in any particular client which is worrisome at this point. Some quarters some clients look better than other clients. So this is just seasonality. There is nothing to read into it.

Okay. And just looking ahead, I wanted to understand that the [pre-badge] deals that you closed this quarter, are they factored into the guidance, as in were they in a position to be factored into the annual guidance?

And also the other dozen that you talk about in the pipeline, is any portion of that factored in the guidance?

So at any point in time we pursue about a dozen large deals. In our definition, large deals are anywhere between $50m to $250m. This quarter we have closed three deals around the $50m range. And we have factored, we have factored those deals into the guidance. The future large deals, the ones over $100m are not factored in dollar guidance.

Right. And just finally on a full-year basis, what sort of an SG&A leverage have you based into the guidance? And any sort of specific kind of measures that will help people achieve that, apart from scale?

Not yet. G&A will remain somewhere between 6% or 7% for the rest of the year. Sales and marketing. G&A will be another 8%.

Okay. Thank you, and all the best.

Thank you very much, ma'am. Next in line we have Mr. Anantha Narayan from Morgan Stanley. Over to you, sir.

Yes. Thanks and good afternoon everyone. For a question, I couldn't understand some of these sensitivities on margins on the BPO side of the business.

Hi. It's (Ramital) here. Yes, if you look at the margin on the BPO side, for every 1% appreciation of the rupee, our margins are impacted by about 85 basis points. If you look at this particular quarter, the impact of the rupee appreciation on -- because of translation as well as adjusting position itself, an almost 9% impact, plus a 2% impact because of wage increase. And as you will see from our net numbers, our margins are down approximately 4.5% to 5%. So we were able to absorb 6% to 6.5% of negative impact this quarter.

Now part of that, hopefully, the rupee if it remains the same, the transition impact will not be there. But as a general guidance, 85 basis point impact because of a 1% rupee appreciation.

Thanks, that's useful. And just one final question, in terms of -- can you just run us through how the margins could shape up on each of these individual factors sequentially for the second quarter?

I think, if you look at our guidance, we assume that the net margins could be maintained similar to what it was last year, it's in a narrow band. The operating margin could come down somewhere between 100 to 150 basis points because we assume the rupee at 40.58 for next three quarters. So the net margin will be maintained similar to last year, it's in a narrow band. Operating margin could come down somewhere between 100 and 150 basis points.

And this is under Indian GAAP, right?

Yes, using the (inaudible).

Okay. So should we expect any variations across the three quarters of broadly basically not too much of a fluctuation?

If you look at the last past few years, normally the margin gets impacted in the first quarter and gets normalized over the next three quarters because there is some lumpiness in terms of visa cost and the employee cost. So the same thing will happen during this year. It will normalize over the next three quarters.

Thanks, Bala.

Thank you very much, sir. Next in line we have Mr. Shailesh from Nomura. Over to you, sir.

Hi. My name is Nitin. I am calling on behalf of Shailesh. Regarding the new services, so basically the packaging implementation which grew at around 8% quarter on quarter, this seems to have slowed down from the 16% that we saw some time last year. Any thoughts as to how -- what are the growth prospects going like in packaging implementation?

So the package implementation stays continuous through robust demand. It is about 18.4%, so that is substantial part of our revenue at this point. And it is showing good demand. At the same time also, please remember, our consulting space has grown 22%. It has reached 4.9%. You may want to look at this as to whether -- because a lot of the package implementation work is also consulting. So these tend to move back and forth a little bit. We are seeing robust demand in both these areas.

Okay. And what is driving the consulting? Is it just the North American market where consulting is -- where consulting with the transformational projects increasing or is it also at the other locations?

I clearly believe it is capability [in DCO]. It is our ability to take transformational projects which I think we have built that capability over the last couple of years. We have been doing a lot of consulting under the package implementation umbrella. Now today we have the ability to engage with the business and do end-to-end transformational projects.

Right. And I'm sure the traction is because we have in there in North America the continuity, this part of our business we are seeing more traction for transformation projects in North America. In fact, just to give you an example, we are transforming this part of -- we won a deal to transform the audit platform for one of the largest auditing firms in North America. So our capability has gone up and our brand has gone up. And that is what is enabling us to win these deals.

Right. That's good. Thank you. And I was wondering if you could share the gross margin side. There was a pretty steep decline off from [46.4] to 42.5. Are we looking at it coming back to somewhere in the 46/47% range or are we -- what's the model looking at there?

The gross margin has been impacted because of rupee. In the next three quarters it could improve slightly because in the first quarter it came down by 300 basis points. Also for the year we are assuming it could decline somewhere between 100 to 150 basis points. So I think it could come back. It will happen gradually over the next three quarters.

So basically we are looking at 100 to 150 basis points decline in gross margin and something similar in the SG&A is it?

No, SG&A will be the same because we have seen this in current sales and marketing costs coming down because of the losses in subsidiaries, so (inaudible) consulting has come down. As I say, SG&A will be at the same level. The margins could improve because visa cost and salary gets lumped up the first quarter. It gets normalized over the next three quarters.

So the margins could improve from the first quarter in the next three quarters. But overall for the year the operating margin could be down by 100, 150 basis points. But that will be more than met up by the non-operating income and the net margin level, it should be similar to what we saw in the last year, within a narrow band.

Right. Your hedging strategy is two quarters forward or is it like one year forward?

No, it's only two quarters forward because in a volatile environment you don't expect (inaudible). We are taking a short-term view. So we are covering our net flows for next two quarters at any point of time. And that is close to $1b. So we have $925m of cover.

Right. Okay. Right. Thank you. Thanks very much.

Thank you very much, sir. Next in line, we have [Mr. Ajay] from [India Capital]. Over to you, sir.

Hi. Congratulations on the good set of numbers. A couple of questions on your guidance. You've kept your dollar margin guidance at an income level almost steady as [direct] in April, while rupee appreciated roughly 5.8% or so since then. How do you expect to keep your net margins steady at 6% rupee appreciation? What sort of assumptions are made behind that?

I think if you look at the first quarter, we had a hedging benefit of around $18m in the non-operating income. That is around 1.8% of the revenue. So if you assume around 7% appreciation in the first quarter, it impacted operating margin by 3.5%. And you had a gain of 1.8% of non-operating. So net/net, the impact on the net margin's around 1.7% or so.

For the next three quarters, the operating margin could improve because some of the costs, like [resale] costs, will not be there in the next three quarters. And also the wage increases which happened in April 1 and impacted the first quarter's margins will get normalized over the next three quarters.

So in the next three quarters, operating margin could improve. On the non-operating side, we have the special income coming in. So that could offset the decline in operating margins. Under the net level, we assume that we will maintain the margins similar to last year's.

What -- just still compared to guidance you gave in April, rupee appreciation is new information, but the hedge, I guess the hedging gains are would impact on that as well. But the [treasury] income would have been -- remaining would have been known at the time as well. Correct?

No. [Treasury] income is a function of how much cash you have in the business to deploy and get results. However, the effective yield has gone up last quarter because the interest rate environment was very favorable. But in the next three quarters we see the effective yield coming down. Already the interest regime has softened across the banks in India. But in the next three quarters the effective yield could come down to maybe 9%. It's already factored into the guidance.

This 18m hedging gain that you had, is it -- how much of the hedge is a mark to market and how much is not?

No, we have $925m of cover. All the hedges have been mark to market at 40.58, which is the closing rate for June. Yes. All the hedges have been mark to market.

And how -- so -- and that what part of the cover is hedged and what part of it is options? Options are not mark to market [are they]?

Out of the total hedges of $925m, approximately 70% is forward contracts, 30% is options. Our policy is to mark to market both options and forward contracts at the closing rate. That is 40.58 for the June quarter.

Just trying to do some maths, we could do this offline, but 18m on 925 roughly is 2% of your cover. With the rupee appreciating roughly 6.1%, how do you reconcile the numbers?

No, no, 18m is a net number. You have a translation loss because you have foreign currency essentially in the balance sheet which also needs to be mark to market at the year-end closing rate. So 18m is a net impact of the hedging benefit we got, minus the translation loss. That is a net impact on the margins.

Thanks. Just one more question on how you calculate [annual] EPS. In the last conference call you made a comment that your share count would be up by 13m because of [ESOR] exercise. But if I look at your Q4 to Q1, your net income and the diluted EPS have not moved in sync. I just think that average share count has -- the weighted average share count has been steady.

No, no, look, we had equally accelerating more number of options at the end of last year because we are getting the newly accretive regime. We have close to 10m shares that got exercised in March. And when we started the year, we said the dilution impact will hurt the EPS growth by something around 3% for the whole year.

And what we are seeing now is because there is a growth, because the margins have improved, they are able to absorb the dilution. That's why in the guidance you see the top line and bottom line almost growing at the same percentage points.

I understand that part. But if I look at average share count by just dividing the net income by diluted EPS, for Q1 and Q4 the numbers I get are almost similar. And basically I get 57 growth [for] 57.3 for Q4.

You are right because most of the [excess] happened in March. Between March and June the impact in the growth was only 1.5%. But if we take the year on year, because you take the average share count for the whole year of last year and this year, the impact would be 3%.

Sure. Thanks. Thanks very much.

Thank you very much, sir. Next in line we have [Mr. Soro] from Kotak Securities.

Yes. This is [Vipin] here. Almost all the questions have been answered. Just finally, once again, what can be the tax rate, Bala, for the current year which we can assume?

The effective tax rate could be somewhere between 12% to 13%. This quarter it was low because there was a tax reversal. And also the tax rate has slightly gone up because of the higher non-operating income. Otherwise the effective tax rate should remain somewhere between 12% to 13%.

Okay. Okay. And just one final, at the cost of repetition, can you just explain why the sales and marketing expenses are lower? You said something regarding the consulting business.

Yes. The losses in consulting have come down, a lot of it because the improved utilization, part of it because of the efficiency they got on the sales and marketing side. That is reflected in the consolidated numbers.

Okay. Okay. Thanks very much and all the best.

Thank you very much, sir. At this moment I would like to hand over the proceedings back to Mr. S. Gopalakrishnan for the final remarks. Over to you, sir.

Thank you very much everyone and looking forward to talking to you during the quarter or at the end of next quarter. Thank you again.

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