CIO budgets may remain flat: Vineet Nayyar and CP Gurnani

India's fifth largest information technology services company Tech Mahindra reported in-line numbers for the December 2014 quarter. The company's deal pipeline remains healthy and it believes client budgets will remain flat this year. Sheetal Agarwal spoke to Vineet Nayyar, executive vice-chairman, and CP Gurnani, managing director and chief executive officer, at Tech Mahindra. Edited Excerpts:

What are your readings on client budgets for this year?

CP Gurnani: Different sectors have different momentum and velocity. Public sector spending, for instance, is down almost all over the world and that puts a pressure on the rest of the economy also. Many governments have chosen austerity as a way of addressing some of their deficits. At the same time, new businesses such as Flipkart or Snapdeal create enough velocity in the market to counterbalance some of the other slowdowns. In today's environment it’s no longer about healthcare it’s also about remote medicine, telemedicine, it is about remote diagnostics. Now that does not get accounted for in any IT budget. So, my personal take is spends on technology are increasing while CIO budgets may be flat. The pressure is to do more technology, which does not mean more IT only.

Ebitda margin gains were lower than expected in the December quarter. What is your outlook and what are key levers of this metric?

CP Gurnani: We have always maintained that we have to balance between growth, incremental investments in new
technology and margins. Also, some of our recent acquisitions such as LCC, which is a $430 million revenue acquisition but it is also an 8.5 per cent Ebitda company. Similarly, Sofgen is also a relatively lower margin company. Now any turnaround or transformation to Ebitda margin is going to take time. Meanwhile, in my current business there is a lot more to be done, particularly around efficiency, automation platforms, and to increase utilisation. We will continue to work on those areas.

Tech Mahindra has been talking about automation. Does this mean that hiring numbers will gradually become irrelevant?

Vineet Nayyar: The intensity of individual use will come down but as I said earlier the slice of the pie may get thin but the pie itself is becoming bigger.

So it does not mean necessarily that you will see reduction in use of people. Instead, each individual will be required to do more and cover a larger span of work because there is an element of automation.

CP Gurnani: The digital economy necessarily means that you understand the business, you are able to analyse, you are able to look at the process and you are able to also apply the right technology. The requirement for all-rounders is increasing. That is where the shift in our own skill development has to take place. We encourage certification but it has to be balanced by the individuals' willingness to change as fast.

You remain optimistic on the growth potential of the European markets. Which geographies will drive this growth?

Vineet Nayyar: Europe is going to be a good play area going forward. Italy, France, Germany and the UK should do very well.

What has led to higher attrition in this quarter?

CP Gurnani: Yes, attrition has inched up sequentially from 18 per cent to 19 per cent.

But remember, this quarter witnessed appraisals and some expectations were not met. Hence the attrition number has seen an uptick.

SpiceJet board clears raising of Rs 1,500 cr as Marans alight

Furthering the revival of the troubled SpiceJet, the board of directors of the airline has approved raising of Rs 1,500 crore through issuance of fresh securities. The board has also approved the transfer of Maran family’s entire 58.46% existing stake, worth around Rs 700 crore at the current market price, to co-founder Ajay Singh.
The airline, which has been facing rough weather, will also get around Rs 375 crore from the Marans in lieu of the non-convertible preference shares to be allotted to them despite their offloading the entire equity stake in favour of Singh. Paving the way for Ajay Singh to take control of SpiceJet, Kalanithi Maran, his wife Kavery Kalanithi and managing director S Natrajhen have resigned from the board.
While the pricing details with regard to the share transfer by Marans were not disclosed, sources said Singh might infuse fresh funds into the carrier and bring in some foreign investors, as was reported sometime ago. The board, in a meeting on Thursday, also approved changing the airline’s registered office from Tamil Nadu to Delhi. The company’s Articles of Association would also be amended.
According to a regulatory filing by SpiceJet, the embattled airline will issue up to 37.5 lakh non-convertible cumulative redeemable preference shares of Rs 1,000 apiece to Kalanithi Maran or Kal Airways, or both.
SpiceJet said its board of directors has taken on record the share sale and purchase agreement between the company, Kalanithi Maran, Kal Airways and Ajay Singh. Besides, the board has cleared a proposal to issue equity shares/warrants and/or any instrument convertible into equity shares whether optionally or otherwise/global depository receipts (GDRs)/American depository receipts (ADRs)/foreign currency convertible bonds (FCCBs) for an aggregate amount not exceeding Rs 1,500 crore or equivalent currencies to any person or persons, whether or not shareholder of the company.
The company’s authorised share capital would be increased to Rs 2,000 crore. This would be divided into 150 crore equity shares of Rs 10 each and 50 lakh non-convertible cumulative redeemable preference shares Rs 1,000 each. SpiceJet would seek shareholders’ nod through a postal ballot for all these proposals.
SpiceJet had last week got the civil aviation ministry’s approval for its reconstruction and revival plan. Following a board meeting, SpiceJet had on January 15 submitted a revival plan proposing transfer of Kalanithi Maran’s promoter stake as well as management control to the airline’s co-founder Ajay Singh.
In further impetus to the revival plan, the Directorate General of Civil Aviation (DGCA) had lifted a ban on advance seat bookings by SpiceJet. Kalanithi Maran, chairman and managing director of the media conglomerate Sun Group, had in 2010 paid Rs 750 crore to buy 38% in SpiceJet from American PE investor Wilbur Ross and the UK-based Kansagra family.

Tata Power to buy Nelco's biz vertical for over Rs 8 crore

Tata Power will acquire group firm Nelco's defence business of Unattended Ground Sensors (UGS) for about Rs 8.3 crore.
For the "slump sale basis" deal, Tata Power has entered into a "binding understanding" with Nelco.

In a regulatory filing, the power utility said the consideration would be around Rs 8.3 crore.
"The UGS business involves supply, installation and servicing of sensors for the Ministry of Defence. After purchase, the UGS business would be housed in Tata Power's strategic engineering division, which is also a supplier of defence equipment and solutions. Acquisition of the UGS business will provide synergies to the existing business of Tata Power SED and has scope for growth and expansion," the filing said.
"The takeover of Nelco's UGS business segment further enhances our presence in the defence segment and provides synergy and alignment in servicing the customers," it noted.
The transfer of the business is subject to approvals and consent of Defence authorities.

Signal to market: Govt won’t appeal pro-Vodafone tax order from HC

Arun Jaitley

Signalling a stable and investment-friendly regime to investors, the government on Wednesday decided not to appeal against the Bombay High Court order granting tax relief to Vodafone.

“The government will not appeal in Supreme Court the October 10 order of the Bombay High Court in the Vodafone case… We want to convey a clear and positive message to investors globally that we will be fair, transparent and within the four corners of law,” Telecom Minister Ravi Shankar Prasad told reporters after a Cabinet meeting.

According to an official statement, the Cabinet also decided to accept all other “orders of courts, ITAT (Income Tax Appellate Tribunal), DRP (Dispute Resolution Panel) in cases of other taxpayers where similar transfer pricing adjustments have been made and the courts, ITAT, DRP have decided or decide in favour of the taxpayer”.

The government’s decision, taken with a view to avoid “fruitless litigation”, will provide a breather to several multinationals which are engaged in similar tax disputes with the Income Tax department. Besides Vodafone, these companies include Shell, IBM and Nokia.

The decision was taken following the opinion of the Attorney General, CBDT chairperson and the Chief Commissioner (international taxation).

It comes at a time when the Narendra Modi government is wooing foreign investors for the success of its flagship programme ‘Make in India’. In the last few weeks, both the Prime Minister and Finance Minister Arun Jaitley have expressed the government’s keenness in ensuring a stable tax regime and doing away with complexities.

The official statement said the decision would bring greater clarity and predictability for taxpayers as well as tax authorities and put an end to the “uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India on transactions related to issuance of shares”.

The case pertains to 2009-10 and 2010-11, wherein Vodafone India Services Private Limited (VISPL), a wholly-owned subsidiary of Vodafone Teleservices (India) Holdings Ltd, Mauritius, issued shares to the parent company at a premium of Rs 8,509 per share. It received a consideration of Rs 246.30 crore from the parent company.

According to VISPL, this was an “international transaction”. However, the transfer pricing officer (TPO) made an addition of Rs 1,397 crore to VISPL’s total income, alleging that the company had underpriced the shares. The dispute resolution panel upheld the TPO’s decision.

However, the Bombay High Court in October 2014 quashed the TPO’s order and said the tax can be charged only on income and “in the absence of any income arising, the issue of applying the measure of arm’s length pricing to transactional value/ consideration itself does not arise.”

Prasad said the Cabinet was of the view that “this is a transaction on the capital account and there is no income to be chargeable to tax. So applying any pricing formula is irrelevant.”

Tax experts welcomed the move and said the decision showed the government’s commitment to a stable tax regime.

India, US envision a new business climate

US President Barack Obama shakes hands with India’s Prime Minister Narendra Modi (L) at the conclusion of a CEO Roundtable and Forum at the India U.S. Business Summit in New Delhi

Visiting US president Barack Obama and American business leaders on Monday raised concern over a lax intellectual property rights (IPR) regime and unpredictable tax system in India, prompting Prime Minister Narendra Modi to offer an open business climate and stable tax polices.

Obama also announced $4 billion worth of investment in India, including $1 billion for financing exports of made-in-US products. Both Obama and Modi pitched for the ‘make-in’ programmes of their respective countries.

At the India-US CEO Forum, the US president said exporters of his country were “very concerned” about issues like IPR as the US was increasingly becoming a knowledge-based economy.

He said the “absence of effective IP protection” in India was affecting business.

“We tend to operate at the higher ends of the global value chain,” he said at the meeting, which included Honeywell CEO Dave Cote, Indira Nooyi of Pepsico, Harold McGraw, chairman of McGraw Hill Financial, Ajay Banga, CEO of Mastercard, and Bob Iger, CEO of Walt Disney Company.

The Indian side included Tata Sons chairman Cyrus Mistry, who along with Cote was co-chair of the CEOs’ forum. Others who attended included HDFC chairman Deepak Parekh, RIL chairman Mukesh Ambani, ADA group chairman Anil Ambani, Adani group chairman Gautam Adani, ONGC CMD Dinesh K Saraf, SBI chairman Arundhati Bhattacharya, Jubilant group head Hari S Bhartia, BHEL head B Prasada Rao, Biocon CMD Kiran Mazumdar-Shaw and Sunil Mittal of Bharti Enterprises.

Mazumdar-Shaw later said US companies complained about counterfeiting and piracy in India, which she hoped would be resolved through a bilateral mechanism.

Parekh said Iger raised the issue of film piracy. Even Modi acknowledged that there was piracy in IT software and films. Finance minister Arun Jaitley, also incharge of information and broadcasting, said the issue would be looked into.

After the US Trade Representative (USTR) last year had said in its much-awaited annual special 301 report that India’s IPR laws and enforcement would be closely monitored by initiating an out-of-cycle review, the two countries tried to narrow down their differences through the trade policy forum. The department of industrial policy and promotion has put a draft on IPR policy in the public domain to revise the policy in general.

Indian companies expressed their worries over visa restrictions and restrictions on gas exports from the US to India.

Obama sought “consistency” and “simplicity” in the regulatory and tax environment in India to significantly increase trade and business between the world’s two largest democracies.

Seeking more US investment into India, Modi said at the India-US Business Summit, organised just after the CEOs’ meet by the US India Business Council, the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (Ficci), that his government had removed some of the “excesses of the past” and promised the visiting US dignitaries “we will now soon address the remaining uncertainties”.

The Modi government has repeatedly said retrospective amendment of the Income Tax Act had scared investors away and declared in this financial year’s Budget that all fresh cases arising out of the amendment would be scrutinised by a high-level committee of the Central Board of Direct Taxes before any action was initiated.

Pledging $4 billion in lending by US banks, Obama said his country was ready to help India grow by working with it in development of infrastructure such as railways, ports, roads and clean energy power plants. The $4-billion programme includes $1 billion for financing exports from the US, the same amount for small and medium industries and $2 billion for renewable energy projects.

At the meeting with CEOs, Modi said he would personally take charge of implementation of big projects and monitor them.

“You will find an environment that is not only open, but also welcoming. We will guide you and walk with you in projects. You will find a climate that encourages investment and rewards enterprise. It will nurture innovation and protect your intellectual property,” he said.

“There are still barriers,” said Obama, adding there was a need to streamline regulations, cut the red tape and jump through bureaucracy.

Appreciating Modi’s reform initiatives to bring investments, he said, “We need to incentivise trade rather than stifle. We need to be transparent, consistent and protective of intellectual property rights.”

“We can work together to develop new technologies to help India leap forward and partner in next-generation clean energy projects and upgrade railways, roads, ports, airports and broadband connectivity to provide the best connectivity to the world,” he said.

He also referred to the three smart cities –Allahabad, Ajmer and Visakhapatnam — that the US would help in upgrading infrastructure.

Reviewing his visit, Obama said the two countries had “a number of concrete” steps for more investments and referred to the breakthrough in civil nuclear agreement, defence cooperation, renewable energy and bilateral investment protection treaty (Bipa).

“When leaders make agreements, our agencies and bureaucracy will follow through,” he said. “We can grow and we can prosper together.”

Obama referred to the current bilateral trade of $100 billion and compared it to the US-China trade of $560 billion, saying, “It can give you an idea of what potential India can unleash.”

India only accounts for two per cent of US imports and 1 per cent of its exports, Obama said, expressing wonder that 1.2 billion people consumed such a small proportion of US exports. Notably, merchandise trade between India and the US was much less at $61.6 billion in 2013-14.

Listing the achievements of his government, Modi said the business sentiment in India was one of the strongest among major Asian markets and consumer confidence had turned positive after three years.

“Growth in eight core sectors of economy has increased sharply. Inflation is at a five-year low; 110 million new bank accounts have been opened in the last four months. Investments from the US have jumped by 50 per cent in the first six months of my government,” he said.

Obama said US companies could help India digitise the accounts opened under the Prime Minister’s financial inclusion programme.

Referring to the 50 per cent jump in investments from the US in India, Modi said, “I know that some of the pledges made in September in Washington have begun to flow in. Yes, I do keep track of these things.” The audience cheered his remarks.

Mahindras plan big push to renewable energy business

Indian conglomerate Mahindra Group plans to expand its renewable energy business and invest Rs.4,500 crore ($732.5 million) over the next three-to-four years, its Chairman said, amid a government-led push to increase the use of clean energy.

Funding
The investment will mainly be financed by taking on Rs.3,300 crore in debt, with the rest funded through cash, Chairman and Managing Director Anand Mahindra told Reuters.
The group also plans to commission 500 megawatts (MW) of solar power projects by March 2016 from 180 MW it expects to complete by end-March this year, he added.
“The (renewable energy) business is going to boom this year. It is a very attractive investment right now,” Mr. Mahindra said on Sunday.
The renewable energy unit, which builds solar power projects and offers off-grid power solutions, was formed in 2011, and is currently one of the smaller businesses of the $17 billion autos-to-technology conglomerate.
Prime Minister Narendra Modi has ramped up his target for solar energy by 33 times to 100,000 megawatts (MW) by 2022 as he bets on renewables to help meet rising power demand and overcome the frequent outages that plague Asia’s third largest economy. Mr. Modi says India needs $200 billion — half of it from foreign companies — to meet its target and the U.S. President Barack Obama pledged on Sunday during a visit to India to support this ambitious goal through additional funding.
Companies such as U.S.-based First Solar and SunEdison Inc already have sizeable businesses in India, while Canadian Solar, China’s JA solar and JinkoSolar Holdings plan to invest in the country. First Solar’s biggest projects in India include a plant with local firm Kiran Energy Solar Power and the Mahindra Solar One plant.

Make Your Best Customers Even Better

Just over a year ago, managers at Kraft believed that their Velveeta brand had only moderate growth prospects. With the consumer migration toward natural and organic products, sales of Velveeta—a processed, unrefrigerated “cheese food”—had languished. The customers who did buy it typically used it once or twice a year, usually to make a party dip. But as we began working with Kraft and analyzing supermarket scanner and consumer panel data, we found a hard-core group of Velveeta fans. They constituted 10% of buyers but accounted for 30% to 40% of revenue and more than 50% of profits. In focus groups, these buyers—whom we dubbed superconsumers—said that they think of Velveeta as superior cheese. They love the way it melts smoothly and easily, and they have myriad uses for it, ones that range far beyond dips (one person even claimed to use a little when making fudge). After we finished questioning the superconsumers, they traded recipes, e-mails, and phone numbers with one another—building friendships around their shared passion for Velveeta.

To restart Velveeta’s growth, Kraft decided to focus on these superconsumers, a group whose size we estimated at 2.4 million. The product team had recently launched refrigerated Velveeta slices, for use on burgers and sandwiches. It had also introduced refrigerated shredded Velveeta, for use in casseroles. Both launches had been surprisingly strong, but they now took on much more importance in light of the superconsumer strategy. Some retail partners began moving the product to the refrigerated dairy aisle, where products have a much higher rate of sales. The strategy inspired a pipeline of innovations to meet new uses. Kraft also began gathering customers’ recipes and finding ways to circulate them among the faithful. “The previous thinking was that the quickest, easiest path to growth was to identify light users or lapsed users,” Greg Gallagher, the marketing director at Kraft Foods, recalls. “But when we talked to superconsumers, we learned that in fact they wanted to use Velveeta more—they were starving for it.” The new product launches have generated more than $100 million in sales. Just as important, managers believe they have found a viable growth strategy for the first time in years.

Every marketer is familiar with the Pareto principle. Known colloquially as the 80/20 rule, it suggests that one-fifth of a product’s buyers are responsible for four-fifths of sales. A similar effect applies to superconsumers. Using Nielsen supermarket scanner data, we analyzed the top 124 consumer packaged goods categories and found that on average, superconsumers represent 10% of a category’s customers but account for 30% to 70% of sales and an even higher share of profits. Most managers take care to offer VIP treatment to these big spenders in order to ensure their continued loyalty, but few make them a focus of growth plans. They assume that these customers are already maxed out and can’t be persuaded to buy more—or they believe other myths about them. In our work with CPG companies, however, we routinely see brands that are able to grow sales by finding new ways to appeal to these customers. And the phenomenon isn’t limited to CPG categories: We have seen companies successfully execute superconsumer strategies in industries as wide-ranging as apparel, consumer durables, and financial services.

Reaping Benefits Beyond Sales
It’s important to distinguish superconsumers from other segments of buyers. They aren’t quite the same as “heavy users”—a product’s highest-volume buyers, in traditional marketing terms. Heavy users are defined simply by the quantity of their purchases. Superconsumers are defined by both economics and attitude: They are a subset of heavy users who are highly engaged with a category and a brand. They are especially interested in innovative uses for the product and in new variations on it. They aren’t particularly price sensitive. Superconsumers tend to have more occasions and “jobs” for a product. Think about hot dogs: While many consumers view them primarily as a food for backyard barbecues, superconsumers see them as an ideal fast meal or an after-school snack.

In our experience, many managers are quick to dismiss the concept of superconsumers or to regard it with skepticism. But as companies build up their analytic capabilities, they are becoming increasingly adept at identifying and engaging these consumers. When they do, they not only find that these shoppers have good reasons for buying so much, but also often discover a hidden appetite to buy more—even in the most unlikely product categories.

Staplers are a prime example. Most people have just a single stapler—or maybe two, one at home and one in the office. But in our work with an office supply company, we identified stapler superconsumers, who own eight staplers each, on average. These consumers don’t do more stapling than other people. Their stapler buying is related to a need to be highly organized: They believe that the presentation of the papers they staple together matters as much as what is on the papers. So they want just the right stapler for each stapling occasion. They keep different sizes and shapes in various places—their offices, their kitchens, their purses, their cars. Absent these findings, common sense might suggest that there would be little ROI in trying to sell someone who owns eight staplers a ninth or a 10th one. But the analysis proves that selling those additional staplers to superconsumers is a smarter growth strategy than simply selling replacements for broken or lost staplers to “normal” consumers.

Companies that focus on superconsumers can realize benefits far beyond an opportunity to drive sales growth. Because superconsumers are already buying your products, it’s easy to reach them. This means that you can dramatically increase the efficiency of your advertising and promotions. Instead of trying to activate lapsed users through expensive mass-market campaigns or paying large sums to deliver coupons to customers who haven’t bought your product in months (and probably won’t buy it now), you can focus your efforts on a narrow slice of your customer base. Direct and digital marketing are often much more effective with superconsumers than with others. That effectiveness can be especially valuable to large CPG companies, some of which spend billions of dollars a year on advertising—and for which a 1% increase in the efficiency of ad spending can therefore be worth tens of millions of dollars.

Many superconsumers are superb at offering insights that can drive product strategy. Because they are passionate about the category, they are an ideal audience for testing out new-product ideas—and in many cases, they themselves are the source of new ideas. Consider another Kraft brand, Breakstone’s sour cream. Shannon Lester, a Kraft brand manager, and his team discovered that many of its superconsumers were blending it with Greek yogurt to create something that tasted like sour cream but had about half the fat and cholesterol and twice the protein and calcium. Breakstone’s had once come up with a similar combination, but the mixture had failed to gain traction even inside the company. After Kraft embraced the superconsumer strategy, however, it retested the product, this time targeting its superconsumers, who loved it. Moreover, many of them offered input that helped Kraft optimize the product, and their insights about presentation helped it gain mass appeal. Demand for Breakstone’s Greek Style sour cream grew so rapidly that the product was available in 60% of U.S. grocery stores within months of the retest—astonishing speed for the success of a new product.
The most important thing we’ve learned in our work with companies that have decided to focus on superconsumers is that the new strategy can become a rallying cry for an organization—particularly one that has been marketing an old, slow-growing product perceived as unexciting. Like many of the best strategies, it is simple to explain, it appeals to logic, and it is easy to back up with data. “To be honest, I was a nonbeliever at first,” says Cannon Koo, the director of analytics at Kraft Foods. “I thought, How are these consumers any different from heavy users? But as we did more and more research, we began uncovering more and more insights that were quite different from what we were used to seeing from heavy users.” Today the Velveeta team uses the superconsumer strategy to plan its media buying, trade promotions, and new-product lines. The brand’s general manager says that in his nine years at the company, he’s never seen a more tightly integrated brand plan.

The superconsumer phenomenon points to a virtuous circle: Often companies can do well by showing more love to the customers who love them the most.