Managing ‘balance-sheet’ recession

These are unusual times for Infosys. India’s second largest information technology products and services outsourcer, and so far the most profitable one, may well lose both tags this year.

While third-placed Cognizant is hot on Infy’s heels in terms of revenues, arch-rival and industry leader TCS, already comfortably ahead of Infosys in terms of overall revenues, is about to pull ahead on the profitability yardstick too, if the results of the first three quarters of the ongoing fiscal are anything to go by.

In the first three quarters of 2012-13, TCS’ average profit margins have pulled over half a per cent clear of Infosys, while the revenue gap has widened to around $3 billion.

Durability Concerns

Over the third quarter, Infosys managed to post a better than expected net profit on the back of several large outsourcing deals — valued at $731 million — won during the October-December quarter, and a higher than expected revenue guidance for the final quarter.

Despite this surprisingly good performance, analysts tracking the stock, as well as long-term Infy watchers are uncertain as to the durability of this comeback.

“Infosys is extremely good — and the people it has at the top are extremely good — at managing in a high-growth environment,” says a senior executive search consultant who has worked closely with market leaders in the IT sector on C-level hires, on the condition of anonymity.

“But one is not sure how well placed they are in tackling a slowdown.”

Well-hedged

But V. Balakrishnan, Infosys’s former Chief Financial Officer (CFO), and the man widely tipped to be a frontrunner for the CEO job in Infosys once incumbent S.D. Shibulal steps down in a little over two years, begs to differ.

He says its business is hedged on both sides of an economic cycle — whether during a boom or a downturn, which it faces at present.

“When times are good, companies spend more on IT because they need IT to manage growth. When things slow down, companies spend more on IT because they are worried about managing costs,” he argues.

Revenue spread

However, Bala, as he is popularly known within and outside Infy, still sees slower decision-making when it comes to technology-related outsourcing spends, despite reports of marginal improvement in the US economy and a complete lockdown in Europe.

This is going to be its biggest challenge. Despite some recent gains in Europe (it won 13 new clients and grew revenues by over 16 per cent during the third quarter in Europe), the company still gets 60 per cent of its business from the US.

Going forward it is working on a 40:40:20 revenue spread from US, Europe and the rest of the world.

“This is a balance-sheet recession and it will take a while and stakeholders need to get used to that,” Balakrishnan told Business Line .

A company can grow in a slowdown, provided there is no prolonged uncertainty in the economic climate,” he added. “But he admits that the current slowdown is inherently different from the ones he has seen in the past, which were shorter. I never saw such a prolonged downturn,” he admits.

Realigning priorities

For Infosys, this has meant a rejigging of priorities.

“It’s not how big a company you are, it’s about how good a company you are,” says Balakrishnan.

For Infosys, this has meant a re-calibration of goals. Growth is still key, but profitability, and the ability to stay competitive in the future, are equally important.

This has meant a shift in focus to the development of more products and intellectual property in-house.

Nearly two years ago, it launched ‘Infosys 3.0’ — an ambitious plan to move the company into high profit business, like high-end consulting and IP-based product innovations.

The goal was to move into “non-linear revenue” growth, which means revenues grow faster than costs.

For a company which has so far focussed on delivering services and solutions to clients, this has also meant considerable need for re-skilling of employees, across the board, from fresh graduates to lateral hires,” he says.

For Balakrishnan, who currently heads the India-focused verticals within Infosys, this has also meant paying more attention to the home market.

Home market

India a growth area for the company, growing at 15 per cent in this fiscal,” says he, adding, “Indian corporates with increased globalisation in sectors like manufacturing are investing in ERP.”

But the big bang might be provided by the government buck.

“As in developed economies, government starts technology investments, which are taken up by the private companies over a period of time,” he says. He is banking on some key reform measures, including a pending Bill on citizen’s rights to get essential services, going through, which will expand the market for IT.

Cash reserves

Balakrishnan ducks questions on the CEO issue, insisting there is a “lot of time” left for that bridge to be crossed. But, as the former CFO, he does address one issue that has been drawing analyst flak — its growing pile of cash in reserves.

Balakrishnan says just because the money is there, it does not mean that acquisitions should follow.

“Unlike other companies, we won’t make acquisitions to grow our revenues. We prefer to have cash on hand and acquire companies that have strategic value.”

COMMENT NOW