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Cover Story
 

A Change in The Infosys DNA?
Besides The Upheaval at The Top, it has been a Defining year for Infosys, which saw some Welcome Growth in Revenue Terms. However, Rupee EPS Guidance is a Concern
Issue Date - 26/05/2011
 
On certain critical counts, it has been a defining year for Infosys, in good ways as well as not-so-good ones. The exit of T. V. Mohandas Pai, member of the board and Director - HR, who had served the company for 17 glorious years, was a setback enough. Matters became worse when Pai began to talk about the preference of Infosys for experience over professionalism when it came to hiring people or moving them up the ladder. For a company where the founders hold hardly around 10% of the shares, it was a serious allegation indeed. That was like suggesting that Infosys wasn’t the ultimate case study when it came to successful separation of ownership vs management, at least not to the extent to which it is perceived to be.

On the financial front, the company posted revenues of Rs.275.01 billion, which was a growth of around 20.9% yoy. Net profits grew by a far more modest 9.7% yoy to reach Rs.68.23 billion. In particular, the company missed its estimate for the fourth quarter, wherein revenue grew by 1.1% sequentially in dollar terms to reach $1.6 billion. The company still faces some instable conditions in the US market and revealed that clients were slow in taking decisions especially in the fourth quarter. There is a disappointment with the rupee EPS guidance as well, which is between Rs.126.05 and Rs.128.21, a growth of 5.5-7.3% yoy. In a statement during the conference call, CEO Kris Gopalakrishnan commented, “Rupee guidance is muted as it is a reflection of the dollar guidance. We look at the appreciation of the rupee and then we translate that.” In addition, the company has hired some 43000 employees this fiscal. Administrative expenses rose by a significant 21.07% yoy to Rs.19.71 billion for the past fiscal. Mostly though, Infosys has had a much better growth compared to last fiscal, when revenue grew by just around 3.5% yoy and net profit grew by 3.6% yoy. In terms of shareholder satisfaction, the company ranks 6th in B&E ‘s list of India’s top wealth creators in terms of absolute increase in mcap of Rs.325.44 billion yoy. But since April 15 when the quarterly results were announced, the company’s share price has been severely hit. Infosys opened April 15 at Rs.3,296.15 and closed 9.67% lower at Rs.2,980.70 on the same day.

 
Going forward, while the company continues to seek opportunities in other emerging markets, the key is going to remain the US, since that is where it still gets around 65% of its revenues. As far as the US market is concerned, Forrester Research concludes in its report that the market for Information & Communication Technologies or ICT (which includes both products & services & involves both government & corporate spending) will grow by around 8% to touch $805 billion in 2011. Of this, IT outsourcing is expected to account for around $104 billion. Though slower than the growth of 8.9% in 2010, it is bullish from the standpoint of the larger base. Consumer spending, which is two thirds of the US GDP, has risen by 4% in Q4, 2010 and unemployment rate has fallen to below 9%, according to Forrester. If these trends continue, the economy should be on a strong growth path.

Besides the protectionist pressures that Indian firms like Infosys faced, there is one more important point to take care of – the fact that location centric advantages are becoming less relevant, thanks to multiple sourcing opportunities being explored by clients. So far, Indian software companies have been able to weather the storm and even gain market share. Dean Blackmore, senior research analyst at Gartner, comments, “In a market that grew 3.1% in 2010, India-based vendors collectively grew by 18.9% (in context of the global IT outsourcing market), increasing their market share from 4.8% in 2009 to 5.5% in 2010.” Yet, caution is advised.

Now the greatest criticism of Infosys has been more towards its conservative nature, particularly towards inorganic growth. Cash is indeed one area, where the company has been far more defensive, with its policy of keeping enough cash reserves for one year of employee salaries at all times. But when it comes to succession planning, Infosys has done a major shift in terms of getting K. V. Kamath in as the Chairman of the company. While promoting S. D. Shibulal to the CEO chair was anticipated, Kamath’s elevation is a first for the company that has traditionally been known to reserve higher positions for its own people. In a past interview to B&E, Kris remarked, “We very rarely select people in direct leadership positions from outside. I also believe that if a company wants a CEO from outside the company, that means the company is not doing well.” While the issue may not be with performance at the moment, recent developments indicate that the company wants to inject some new thinking into its DNA, particularly the kind that took ICICI Bank to new heights. Besides, it does silence quite a few voices that consistently point out how the company is still very founder driven.

Virat Bahri           

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