Infosys' struggle with growth continues

The takeaway from the fourth-quarter numbers of Infosys is that it will find it tough to grow at par with the rest of the industry.

The firm has said it expects dollar revenues would grow seven-nine per cent in FY15 against Nasscom's guidance of 13-15 per cent growth in software exports.

The market expects Infosys to ‘positively surprise’ by growing revenues by eight-nine per cent in FY15, but it is still below the industry’s average.

Infosys’ commentary suggests its growth pangs are not yet over.

While it has expanded margins for two successive quarters, analysts say it has earned short-term gains by sacrificing long-term investments in the sales engine.

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There are several reasons: First, Infosys is unable to either win new deals or mine existing clients.

In a call with analysts, CEO D Shibulal said: “Repeat business is reset at first quarter of the fiscal. It will keep coming down as the year progresses as new business comes in.”

But the new deals are yet to yield gains for the company.

Infosys has been announcing new deal wins for the past several quarters, but they are not visible in its revenue growth. In Q4, it won four new deals worth $700 million.

Infosys continues to blame delays in ramp-ups and weather conditions for its weak revenue growth.

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However, its peers are clocking better growth rates with similar deal sizes.

Bad weather conditions resulted in several retail clients delaying projects in Q4.

B G Srinivas, president of Infosys, said he saw weakness in financial services, retail and even manufacturing.

What is more worrisome is the claim that the revenue sensitivity to macro data from the US has increased, affecting its quarterly performance.

“Bad weather conditions resulted in several retail clients delaying projects in Q4,” said Srinivas. K R Choksey says the dip in revenue from the US for the second consecutive quarter (by 0.7 per cent sequentially and 0.8 per cent in Q4 and Q3 FY14, respectively) is a concern area.

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The other factor impacting revenues is the shift in its revenue mix.

Infosys is increasing the share of offshore effort and reducing onsite projects.

While this helps margins, the overall billing comes down.

Onsite's share has dipped from 32 per cent in Q1FY14 to 29.4 per cent in Q4.

However, with high attrition rates, execution could suffer.

The other factor which would hurt growth is the elevated level of attrition. Infosys may have given two wage hikes this year, but analysts say it is unlikely to bring down attrition rates, which stood at 18.7 per cent in Q4. Infosys is caught in a classic growth conundrum.

If it is to grow, it'll have to sacrifice margins by investing in its sales force.

For two consecutive quarters, the firm has expanded margins, but gains would be capped in future if it chases growth.

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