Infosys Charting Turnaround to Regain Lost Ground

Edited by Vani Rao

Cedes its top ranking to arch rivals in last few years

Infosys Limited (NSE: INFY), the erstwhile bellwether, has lost its charm and the leadership to its peer in recent times. Tata Consultancy Services Ltd. (NSE: TCS) moved up to gain the top position, followed by Cognizant Technologies in the Indian IT market. The market capitalization of Infosys fell to Rs 1,65,917 crore in FY2013 from Rs 1,86,100 crore in FY2011. Apparently, Infosys, known for its meritocracy and best practices, has woken up from its slumber and is gearing up for a change.

Source: Brand Finance
Source: Brand Finance

As shown above, TCS’s brand value has increased around 29% during FY2012 and FY2013, whereas Infosys’ brand value has reduced by 39% during the same period.

What Went Wrong!

Post the 2008 subprime turmoil, the IT clientele became more prudent while investing in tech-infrastructure. Infosys failed to realize the change in the industry. In the past, Infosys developed its growth framework on the basis of big-ticket sizes and higher margins. This model was the key factor for triggering its downfall in the current global recessionary trend. Also, it paved a way for its competitors to increase their revenue share with aggressive pricing tactics. Today, Infosys has lost its bargaining power with its clients as opposed to its position to command a premium in the past. In 1995, the company decided to discontinue its contract with General Electrical (GE) at a time when GE contributed approximately 25% of the total revenue. This reflects the rigid high pricing and margin model that the company followed in the past.

As reported by Gartner chief Partha Iyengar, the company lost sight of the future almost for last five years. All this while, its competitors were gearing for a bigger game plan with organic as well as inorganic growth strategies, more geographically diversified portfolio, and competitive pricing. Its arch rival TCS penetrated the developed and developing economies irrespective of the ticket size or margin of the projects, thereby laying a foundation for reaping benefits of any upward momentum in the global economy. In FY2013, TCS generated around 7.8% of its overall revenue from the domestic market, while Infosys reported 2.1% revenue from its Indian operations, clearly indicating the inclusion of portfolio diversification by its peers.

Investors Returns – Infosys vs. TCS

The chart below clearly explains how Infosys’ investors barely managed to earn 2.7x of the investments as against whooping returns of 7.5x for TCS investors during the period 2008-2013.

Infosys vs. TCS normalized price movement charts considering a factor of 100 as of December 2, 2008

Source: Bloomberg
Source: Bloomberg

Marketing is the Key!

Infosys lagged behind its peers in its marketing efforts, which is clear from the repeat customer dominating the revenue contribution. During FY2013, the company added 235 clients, of which approximately 97.8% were repeat customers. This is a positive sign in terms of customer loyalty, but it failed to generate growth in terms of new client acquisitions.

Can Infosys Achieve Turnaround?

As of March 2013, Infosys was debt free and was sitting on a cash balance of Rs 21,832 crore, which was around 50% of its total assets. Even amidst the present turmoil, the company is one of the leaders in terms profit margins. Also, Infosys has enviable cash receivable aging of around 60 days. All the above factors come out of to be the saving grace to the current investors. Founder and Executive Chairman of the Board Narayana Murthy is also back to script the turnaround for the company. Gartner, Credit Suisse, JPMorgan, and Deutsche Bank have reacted negatively to the management changes together with the inclusion of Murthy and indicated that this comeback may not resurrect the company to its prior glory.

Bold New Steps Could Propel Growth

However, new strategies like focusing on flexible pricing, counting on employee cost reduction, trimming the number of senior employees, checking the recent senior management exodus, and introduction of a new model that will reduce the onsite work are the recent moves taken to fuel future growth. As per the recent company update on 11 October 2013, Infosys revised its guidance upwards to 9-10% for 2013-14 compared to the earlier forecast of 6-10%. The stock has surged up by more than 7% from Rs 3,124 since its announcement of revised guidance on October 10, 2013 to Rs 3,348 as of December 3, 2013. We need wait and watch if the Infosys stock can sustain this upward trend. Looking at the recent happenings and events, the market reactions are mixed. However, given some more time things make look clearer.

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