Testing times @ Infosys

In the first quarter of the 2013 fiscal, Infosys did the unthinkable. It announced that it would not give quarterly guidance on its numbers.

This guidance, which for years has set the tone for IT sector results, was met with muffled gasps in the customary press conference.

This was an admission that profits were becoming less predictable for the IT bellwether.

This sentiment extended to the management’s body language in the last three quarterly results announcements.

When Nandan Nilekani was the CEO, he would comply with photographers’ requests for clicking him in picturesque locations inside the Infosys campus.

Fast forward to 2013: CEO S.D. Shibulal and others walk in and largely stick to a choreographed routine.

To be fair, it is a function of the changed business environment.

Challenging times

The company, which has many firsts in Indian corporate history, is facing one of the most challenging times in its existence.

The contrast between Infosys’ numbers and those of rivals such as TCS has had the stock lag behind its IT peers.

The stock’s underperformance on the bourses has not gone unnoticed either.

Analysts have been critical of the company’s lack of aggression in chasing volumes and securing new clients.

Changes in strategy

They say that Infosys has trained its sights mainly on retaining profit margins in recent quarters, at the cost of business growth.

Rivals such as HCL Technologies have managed to deliver superior numbers even amid the recent slowdown. What is not reflected in the numbers is the fact that Infosys is trying to change its business model, with an eye on the long term.

Since Shibulal took over last May, there have been a set of changes in strategy.

The focus is now on software products, platforms (with which Infosys can reuse its code to other business areas) and solutions.

Infosys is also eschewing scale in favour of high margin revenue in traditional areas such as systems integration, consulting (technology and business) and others. Some of the business areas are getting highly commoditised due to Indian and foreign companies increasingly undercutting prices, according to Sanjoy Sen, Senior Director at Deloitte India.

This decision to focus on products, platforms and solutions is yet to convince investors.

However, Shibulal points out that this strategy will take time and asks his detractors to take a look at the total contract value of the business in this area.

“Currently, this business has contracts worth $500 million and it has booked $100 million of them already,” he asserts.

Declining margins

In the first half of FY13, Infosys has seen its margins decline by 200 basis points due to employee wage hikes, points out Shashi Bhusan, Senior Research Analyst, Prabhudas Lilladher.

Some of its peers – TCS and Cognizant – while maintaining the challenging outsourcing environment have insisted that they have good margins and it is on the up (at the time of writing this, TCS, Wipro and Cognizant did not report their July-September quarter results).

Infosys itself says that some of its clients are asking for pricing renegotiations and some of them stopped giving business in the range of $100-300 million.

In the first quarter, there was another cancellation of a European project worth $15 million.

According to analysts, Infosys has already started giving price cuts to top clients and going forward this will result in steady growth.

A recent report by Deutsche Bank, which was based on confidential discussions with 55 buyers across 15 countries, pointed out some specific problems that include complacency at managing small but long-lasting customers, which resulted in losing some of the incremental business from these customers to tier-2 Indian vendors.

Further, the report has pointed out that extreme risk aversion and premium pricing can be impediments for winning new business when customers are focusing on cutting costs and gaining efficiency.

Add to that, many top customers are not considering Infosys is a cause of concern, according to Deutsche Bank.

A glass half full

Investors are squirming at the recent management changes at a time when the company needs a steady hand to steer the ship. “Since the last couple of years, we have seen a lot of management changes and it is a cause of concern,” says Ankita Somani, IT analyst at Angel Broking.

Since last year, Infosys saw exits of board member Mohandas Pai, sales head Subhash Dhar and Ritesh Idnani who was the Chief Operating Officer of Infosys BPO.

Further, Chief Financial Officer, V. Balakrishnan, 46, who held the post for six years, has moved to a new role and will head the India and BPO businesses. The 39-year-old Rajiv Bansal, Vice-President, Finance, will be the new CFO, from November.

“Bala is stepping down at the wrong time. He should still be around at a time when Infosys is going through a tough situation,” said Rajni Ghildiyal, Analyst, Asit C. Mehta.

Similarly, Moshe Katri, MD, Cowen and Co, in a note said with Balakrishnan being re-assigned, investors still do not get a feeling that the turmoil at Infosys is over.

However, when Business Line met Shibulal a few weeks ago, he said “choices we make today are most aggressive ones to build our future.”

Also, this recent attrition has not prompted the company to cut back on its hiring numbers despite a large bench (where people are working for the company but not on any projects).

“Though we are carrying a $500-million cost involving our employees on the bench, we will honour our commitment of hiring about 18,000 from campuses,” said Balakrishnan.

Cash pile

Then there is the issue of the $4.1 billion of cash that is sitting on the books despite recent acquisitions like Swiss-based consulting company Lodestone.

While Bala used to joke that he was the largest fund manager in the country, investors want to see this cash being put into good effect.

After the first half of FY13, the company requires a minimum of 3.5 per cent growth in every quarter to meet its 5 per cent annual guidance.

“In the current scenario, it looks stretched,” says Somani of Angel Broking.

Also, consider the fact that traditionally growth in the second half of a fiscal year slows due to holidays in the US and budget allocations for the next fiscal and Infosys has its job cut out.

Despite these concerns, there are positive headwinds.

Infosys would do well to find answers from within rather than blame external factors for its current state. The company is sitting on a huge cash pile and has a strong image with many firsts to its credit.

One will get to know whether the Infy strategy is succeeding or not in the next two quarters.

> Venkatesh.ganesh@thehindu.co.in

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