Infosys has disappointed the street with its financials over the last few quarters, and even lost its bellwether status. However, an unperturbed management is banking on much better numbers in the medium to long term with its strategic transformation. Can they pull it off?
As I entered Gate No. 2 of the Infosys headquarters at Electronic City, Bengaluru, I could detect a heightened buzz in the environment, which I am otherwise very familiar with. A number of additional security personnel were combing the area, and no vehicles were being allowed to stop anywhere near the gate; in fact, even visitors were not allowed to stand and wait in the vicinity. Later, I realised that all this was happening because the President of Tajikistan Emomali Rahmon was visiting the campus on that particular day. Visits by heads of state & renowned foreign dignitaries to the Infosys campus is not uncommon, and there is a special area within the campus that has trees planted by these people. Respect was the foremost criteria on which Infosys Chairman N. R. Narayana Murthy built the company and indeed, it continues to be respected for much more than the manner in which it has grown from scratch to a $6.99 billion company in 30 years, and led the industry in absolute profitability for most of them. However, the past few quarters have seen the company miss some of its sheen on the bourses. Investors are particularly peeved with the company’s muted guidance that compares unfavourably to TCS and Cognizant (and to NASSCOM!), while being quite in line with the guidance of Wipro. When you look at the results of the quarter ending June 2012, Infosys posted a revenue of Rs.89.09 billion, a growth by 29.02% yoy and a profit figure of Rs.22.04 billion, a growth by 20.9% yoy. In comparison, TCS posted a revenue of Rs.114.11 billion, a growth by 32.47% yoy and profits of Rs.27.97 billion, a growth by 35.64% yoy. In dollar terms, Cognizant, which overtook Wipro in terms of revenues last year, has even overtaken Infosys with revenue of $1.795 billion as compared to $1.75 billion for the latter. Due to these reasons, TCS has now become the bellwether of the stock market, a position that Infosys held earlier. Moreover, the company’s guidance of around 5% revenue growth for FY 2012-13 has disappointed investors, since NASSCOM has provided a guidance of 10-14% in terms of industry growth.
Infosys maintains that the environment is volatile enough, and there is nothing materially positive to justify a higher guidance for them. Some critics say that the company’s single-minded focus on margins is the reason (making it lose some lucrative deals in a scenario where players are getting too aggressive on price), while some say that the company’s succession plan hasn’t gone well. It’s reluctance to latch on to M&A targets is a debate that certainly wasn’t born yesterday, though the company did manage one acquisition of late (the $350 million acquisition of consulting firm Lodestone) to show that it really is serious about inorganic growth now. To make matters worse, Infosys has delayed increments for its employees, which is all the more disconcerting for company watchers, who feel that this will only lead to an increased attrition of quality manpower.
In an exclusive with B&E, S. D. Shibulal, CEO & MD, Infosys, defends, “People link price and margin directly. Margin is a reflection of the company’s aspirations, philosophy, efficiency in operations, how do you manage, et al.” He asserts that there are as many as ten levers on margins that he can identify, which include things like onsite-offshore ratio, utilisation, pyramid structure and client choices apart from price. Moreover, he asserts that client deals today are strategic, and Infosys doesn’t really walk away from deals just because it has to bring its price points down. However, he also admits that having industry leading margins has remained a long term strategic focus area for Infosys.
As I entered Gate No. 2 of the Infosys headquarters at Electronic City, Bengaluru, I could detect a heightened buzz in the environment, which I am otherwise very familiar with. A number of additional security personnel were combing the area, and no vehicles were being allowed to stop anywhere near the gate; in fact, even visitors were not allowed to stand and wait in the vicinity. Later, I realised that all this was happening because the President of Tajikistan Emomali Rahmon was visiting the campus on that particular day. Visits by heads of state & renowned foreign dignitaries to the Infosys campus is not uncommon, and there is a special area within the campus that has trees planted by these people. Respect was the foremost criteria on which Infosys Chairman N. R. Narayana Murthy built the company and indeed, it continues to be respected for much more than the manner in which it has grown from scratch to a $6.99 billion company in 30 years, and led the industry in absolute profitability for most of them. However, the past few quarters have seen the company miss some of its sheen on the bourses. Investors are particularly peeved with the company’s muted guidance that compares unfavourably to TCS and Cognizant (and to NASSCOM!), while being quite in line with the guidance of Wipro. When you look at the results of the quarter ending June 2012, Infosys posted a revenue of Rs.89.09 billion, a growth by 29.02% yoy and a profit figure of Rs.22.04 billion, a growth by 20.9% yoy. In comparison, TCS posted a revenue of Rs.114.11 billion, a growth by 32.47% yoy and profits of Rs.27.97 billion, a growth by 35.64% yoy. In dollar terms, Cognizant, which overtook Wipro in terms of revenues last year, has even overtaken Infosys with revenue of $1.795 billion as compared to $1.75 billion for the latter. Due to these reasons, TCS has now become the bellwether of the stock market, a position that Infosys held earlier. Moreover, the company’s guidance of around 5% revenue growth for FY 2012-13 has disappointed investors, since NASSCOM has provided a guidance of 10-14% in terms of industry growth.
Infosys maintains that the environment is volatile enough, and there is nothing materially positive to justify a higher guidance for them. Some critics say that the company’s single-minded focus on margins is the reason (making it lose some lucrative deals in a scenario where players are getting too aggressive on price), while some say that the company’s succession plan hasn’t gone well. It’s reluctance to latch on to M&A targets is a debate that certainly wasn’t born yesterday, though the company did manage one acquisition of late (the $350 million acquisition of consulting firm Lodestone) to show that it really is serious about inorganic growth now. To make matters worse, Infosys has delayed increments for its employees, which is all the more disconcerting for company watchers, who feel that this will only lead to an increased attrition of quality manpower.
In an exclusive with B&E, S. D. Shibulal, CEO & MD, Infosys, defends, “People link price and margin directly. Margin is a reflection of the company’s aspirations, philosophy, efficiency in operations, how do you manage, et al.” He asserts that there are as many as ten levers on margins that he can identify, which include things like onsite-offshore ratio, utilisation, pyramid structure and client choices apart from price. Moreover, he asserts that client deals today are strategic, and Infosys doesn’t really walk away from deals just because it has to bring its price points down. However, he also admits that having industry leading margins has remained a long term strategic focus area for Infosys.
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