Rediff.com« Back to articlePrint this article

Infosys' result: Harbinger of bad times?

Last updated on: April 17, 2012 08:05 IST
An employee walks out of an iconic pyramid-shaped building made out of glass in the Infosys campus at Electronics City in Bangalore.

Infosys Technologies' fourth-quarter results have been poorly received. The bellwether stock has taken a severe beating, bringing the markets down with it.

A final judgement on the firm's current performance will have to await the results of other leading software companies like Tata Consultancy, Cognizant and Wipro in order to determine whether the negative vibes in Infosys' guidance are perhaps a harbinger of renewed hard times for an industry which had appeared to have been recovering from the shock delivered by the financial crisis of 2008.

Infosys's own explanation of its performance is that it is not going after volumes in a commoditised market, as that end of the business has a clear end-point.

Click NEXT to read more...

Infosys' result: Harbinger of bad times?

Last updated on: April 17, 2012 08:05 IST
Ratan Tata, Chairman of Tata Sons, at a news conference in Mumbai.

Instead, it is going after non-linear growth - breaking the link between volume and revenue growth on the one hand, and hiring growth on the other.

Infosys has clearly declared that with around a third of its business coming from systems integration and consulting, it is targeting higher value-added business, which is dependent on discretionary spending. Specifically, US regulatory requirements have forced some clients to postpone their investment decisions in the last quarter.

Not going after volumes means lower topline growth in hard times, but more stability in profit margins.

Click NEXT to read more...

Infosys' result: Harbinger of bad times?

Last updated on: April 17, 2012 08:05 IST
Azim Premji, Chairman of Wipro, at the Wipro campus in Bangalore.

This is precisely what has happened. In the quarter just ended, Infosys posted a sequential fall in its topline of 4.8 per #162 but the net margin has done well at 26.2 per cent - a clear one percentage point improvement over the previous quarter.

Going by past experience, there is little chance that any software services player, be it in India or elsewhere, will be able to better this. Cognizant, which has justly been feted for rapid growth of topline, posts margins way behind those of Infosys.

It is not as if Infosys has done well by its own standards. It is the first time in two years that it has posted a fall in sequential topline performance.

Click NEXT to read more...

Infosys' result: Harbinger of bad times?

Last updated on: April 17, 2012 08:05 IST
Workers at their workstations on the floor of an outsourcing centre in Bangalore.

This is something that it had neither anticipated nor planned for. The decision to postpone the annual announcement on increments will also not go down well with employees.

This may result in higher staff turnover and a slow decline in employee motivation in a company that at one time commanded enormous loyalty. If employees are not very happy, investors are even less so.

The company continues to sit on a huge pile of cash which keeps growing, without it being put to any good use. It is customary for successful businesses globally to return money to shareholders if they are unable to deploy it for good returns and do not see any prospects of doing so.

Click NEXT to read more...

Infosys' result: Harbinger of bad times?

Last updated on: April 17, 2012 08:05 IST
Workers are pictured beneath clocks displaying time zones in various parts of the world at an outsourcing centre in Bangalore.

Infosys has traditionally been highly conservative about acquisitions. So its chances of making large acquisitions in the medium term appear remote. It therefore has to come up with a credible plan which explains what it proposes to do with its cash.

The excuse that it's waiting for a rainy day does not sound credible, as rainy days have come and gone - but the cash has remained.