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March 20, 1999


'The responsibility is much more with the NASDAQ listing.' Infosys Technologies COO Nandan Nilekani speaks about the challenges at hand after the recent ADR issue. He points out that now there are a lot of people keeping an eye on their performance and the US market. The party is just over. Infosys Technologies of Bangalore, code named INFY, has led India Inc into the Mecca of hi-tech stocks, the NASDAQ.

Email this story to a friend. Fireworks heralded the listing earlier in the evening at the headquarters of the software major in Bangalore.

John Wall, president of NASDAQ International, had cut the cake, uncorked the champagne and poured out a glass for the young, dapper President, Chief Operating Officer and Managing Director Nandan Nilekani.

A few minutes later, Nilekani, with an unusually tall glass of champagne in hand, is walking along with a few reporters, refusing to answer questions.

We all stand by to overhear the rather loud conversation over the cell phone that an agency reporter is having with his boss, long-distance: "Yeah, started trading at 37 dollars. Oh, I see, what did you say, trading at 41 now? Are you sure? Yeah."

Nilekani goes quiet. A moment later the tall champagne is bottoms up. The only other sign of excitement is in his eyes for all to see.

The 43-year-old Nilekani from IIT Bombay had set up Infosys along with other co-founders 18 years ago. They have since worked hard with brilliant strategy to make Infosys one of the most respected software companies in India. Now, they have established themselves as a truly global company with the NASDAQ listing.

Today, the Infosys market value is put at $1.9 billion.

But just try talking to Nilekani about how he does it. It's a flat no, no, no to anything personal: "What profile? What do I do? It's work, work, work... very boring life... Why would anyone be interested in me."

Yet, he agreed to meet Rediff for an interview. However, he is still cagey about the American deposit receipts. "Talk to analysts, not me," he insists, as the issue of $57.5 million notches up to $70 million in the first two days of listing. Excerpts:

Did you expect this kind of a response for the ADR issue?

Well, I think it is a tricky question. I think the response was good. The response for the road show was good. The ADR as well as the post-listing show was good. I don't remember what we had expected, but it was good.

Very briefly what are the reasons for going in for the ADR?

Four reasons. First was to raise capital for the growth of the company, particularly for infrastructure. Bulk of it for both India and outside. Second was to build a brand, to get more visibility for Infosys as a global technology company. Third was to add dollar based stock option schemes that we want to offer to our international employees. They are eligible even now but the Indian rupee scheme has no meaning in the US. Fourth is to create a framework for acquisitions in the future.

Once you have a dollar listing, then you can either issue more stock or raise more cash and get the ability to buy companies.

Will that shift the focus of your company from services...?

No. That wouldn't change. I think even in the services space, the thing is that we can raise the revenue per employee. (Currently $57,000 per billed employee and there are 2,000 such revenue earners). Then, of course, a lot has to do with your approach and what you can offer on table. But some of it has to do with your brand perception as the leader, as a company that is well known. So, I think, we are looking at it as a name-recognition exercise because we want people to know who we are. And a lot more needs to be done there.

How do you explain the concept of notional loss in the fourth quarter?

That is because of the stock option scheme. See, we issue shares at Rs 100 each to our employees when the market price is Rs 3,000 or Rs 3,400 or whatever. (At present the percentage of equity held by the employees is 10 per cent and there have been two bonuses).

Under Indian GAAP (Generally Accepted Accounting Principles) we don't have to take charge in the P&L (profit and loss) statement.

In US GAAP, the difference between the market price of the share and the price given to the employee has to be taken as a charge against your profit and loss statement.

So, when we had a bonus issue in December, which went into effect this quarter, half of the shares (which were the bonus shares) became free of any vesting.

They became free. They are not locked in like the ESOP (Employee Stock Option Plan) shares. They are part of the scheme and the amount of charge that you took was the function of vesting schedule, so half the shares became fully vested, rather, free of any lock-in.

We have to take that size charge on the balance sheet. So, you have non-cash no recurring charge. It's a book loss in US GAAP. (Not in Indian GAAP).

How different or difficult is the US GAAP for Indian companies?

I think in the US GAAP, Indian companies will have to do a lot of work... Their way of accounting, like the way they treat depreciation, the way they look at employee liabilities in the future, lot of those things... How they recognise revenue, all these things are important.

For example, US GAAP has very clear norms for revenue recognition. At what point in a project can you keep this revenue as earned and if you have not completed a project then and you have received some money you have to keep it as unearned income. You can't show it in your revenue. Lot of things like that.

For example, consideration of subsidiaries. Under Indian law you need not consolidate your subsidiaries. In US, if you have economic control over a company, its entire losses must be consolidated in your balance sheet. That's another comparison between US law and Indian law.

But broadly accounting and disclosure is very stringent. So every Indian company will have to recast the balance sheet as per the US GAAP.

When did Infosys change to US GAAP?

Three years back Infosys started reporting its accounts as per the US GAAP. Even prior to the NASDAQ listing, Infosys had a large number of international shareholders.

Thirty per cent of our outstanding equity is held by global investors and global investors are investing in the US, India, Latin America etc.

And, since US GAAP is widely accepted as the norm, we thought for the benefit of our international shareholders, it is advisable to use US accounting standards.

In fact, if you go through our annual reports, we give six other GAAPs, UK GAAP, Japanese GAAP, German GAAP...

In general, do you think market capitalisation is a valid way of gauging size or strength of a company or personal wealth of shareholders?

Market capitalisation is one of the indices. You look at sales. You look at profits. You look at return on capital. I mean, so many aspects. Is it the sole index? No. You look at several other things. (Incidentally, market capitalisation of Infosys is at present around $2.4 billion).

There is a big jump in your total income for the nine months ending December 1998 as compared to the previous fiscal, from Rs 2.61 billion to Rs 3.59 billion. How do you explain this?

Lot of business. We added 21 customers from April to December. Over the last two years, we have had 120 customers. So we now have very diversified customer base ranging from retailing companies (Northstorm) to telecom (Nortel) to finance companies (VISA).

So, we have a huge range of customers. All that is coming together, lot of customers, growth in employees, growth in demand...

(The total income of Infosys from North America itself accounted for nearly 82 per cent with Europe taking 9 per cent).

What kind of a future do you see for software companies in the post Y2K scenario?

I think the software industry will have a lot of opportunities. The key for any company is not to be overly dependent on any one service. It's a question of how well you have broad based your business.

Obviously, you cannot heavily depend upon just Y2K because then you may have potential deceleration. But if you have a good all-round strategy then there is enough. E-commerce is becoming a big area; package implementation is becoming a big area...

How much Y2K business do you do?

Nineteen per cent of our revenue came from Y2K in the third quarter and 22 per cent for nine months till December 1998. I expect we will end the year with about 20 per cent.

Will it lead to a situation where small companies will get merged or get eaten up by the big fish?

It's possible. In many industries, after a period of high growth, when the growth rate has slowed down, then the consolidation process takes place. The number of players reduces.

Do you see it happening by the end of this year?

I really don't know. But broadly, a lot of activity is happening. Y2K is just one of the activities and global IT services business is still growing and so I think if a company has a well designed strategy, then it should do well even in the post-Y2K scenario.

If there is too much dependence on Y2K, then yes, they will take a hit. But if they have a balanced portfolio of services, I think they will survive.

How choosy have you become about recruitment?

Very choosy. That is the key thing, you know. To make sure that the people you hire are the best in class. That's one thing we don't compromise on.

Are you more choosy now than before?

As choosy as before. Even in 1998 fiscal, we received over 70,000 applications and we picked 1,300 out of that.

What is the retention rate? And, why do people go and where do they go?

Eleven per cent attrition rate (which is still way below the industry average of about 30 per cent).

They go abroad or for higher studies. Nobody leaves Infosys to go somewhere else.

Bulk of our people come from the ranks. We also have lateral inductees but not much. We have made such induction in engineering services, banking and the like.

Now that the ADR issue is over, what are your working hours like?

I think at Infosys, we maintain long hours. Monday to Friday, 11 to 12 hours a day, starting 8 am. Saturday also, we work five to six hours... That way we are really boring.

How often do you travel abroad?

Once a quarter abroad. Two to three months in India.

Post-ADR, are you more relaxed now?

No. ADR has put a huge responsibility on us. Because a lot of expectation has been built over the performance of the company and everybody is looking at the company. So, I think it's even more of a responsibility now to perform and deliver and meet expectations of the customers, investors, employees...

What do you do in leisure hours?

Just exercise, play badminton... otherwise, there is very little time for any other activity.

Ten years back, did you expect to be here today?

Certainly, this is not something we could have conceived. We would not have visualised something like this. The responsibility is much more with the NASDAQ listing. There are a lot of people keeping an eye on our performance and the US market. They have very high expectations.

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