"Good things don't come cheap"
A day before he jetted off to Europe to meet with key customers, Azim Premji sat down with BT's Venkatesha Babu and Rahul Sachitanand to talk about Wipro and the road ahead.
From your perspective, how bad is the subprime situation in the US? Will it affect IT demand in America?
The subprime issue is getting too much attention, since some large companies such as Bear Stearns are resetting their debt-equity norms. Investors and public don’t know how deep the problem is, and when there is uncertainty they assume the worst. However, we find the European economy, specifically the German market, as well as other geographies like Japan doing well. Their investment in IT is significant and their openness to global sourcing is also more. In the US, while we’re not seeing a slowdown we’re not seeing a drastic step up in IT investments. We don’t want to take a call on a slowdown for now and will wait for the rupee to settle.
How long can the IT industry sustain its 25-30 per cent growth rate?
I think it can be sustained for at least the next five years. The Indian market is growing, we’re growing at 40 per cent year compounded and globally at 25-30 per cent per annum.
Is the stronger rupee a long-term concern?
We’re clear that the Indian rupee will settle at 40-41 to the dollar; it’s been hovering around 40.70 and 40.25. We see this as a reset and not as a temporary fluctuation.
Do you see consolidation happening in the IT industry?
You’re seeing it happen already and with the reset of the Indian rupee you’re seeing it happen faster. This is for two-three reasons: One, it’s a 12-13 per cent firmness of the rupee and 5-6 per cent erosion in operating margins. The smaller companies that were operating with 10-14 per cent operating margins are going to find it very difficult. Larger firms will have to drive pricing, non-linearity, better operational efficiency and go up the value to partly compensate for this appreciation.
Two years ago when Vivek Paul, your erstwhile CEO, quit there was talk of differences in strategy. However, the last eight quarters seem to have disproved these theories. What changes did you make?
The clear signal was that we were under-investing for the future. We have begun to right (our investing) now. We have increased training spend on our overseas hires five or six fold per capita. We’re investing significantly in 75 mega and gamma accounts, since we found we were slipping back on this aspect.
Do you have specific targets for your company?
We don’t want to make forward looking statements, but the analysts are saying we (Wipro’s global IT business) would be $3-3.2 bilion and our India business around $1 billion, while our non-IT businesses are alone $1 billion with the recent deals they have made. We would like to be in the top-10 in revenues globally in the IT business.
There is this perception that Wipro made an expensive acquisition of Infocrossing at 14.2X EBITDA and 2.5X revenues.
We have wooed Infocrossing for a long time and we’re the largest player in the technology infra business and total outsourcing business. One of the setbacks we had on large deals was our inability to give hosting services in the US and Europe. Customers wanted a physical presence in the US and Europe and this is the expertise Infocrossing brings in. You must realise that good things don’t come cheap. If things are cheap they don’t have strategic value, because there are 20 others chasing them.
Are there integration challenges with these large M&A deals?
Of course, there are challenges in integration and because of these challenges, we are cautious with the size of deals we have done. The latest deal is more challenging since it is a different kind of business and we will have to put in more top management energy and time and we may make some more movements on this. There will be some internal restructuring to drive growth.
