Infosys Growth Slides - Questions To CFO Of Infosys

Posted in Finance Articles, Total Reads: 2490 , Published on 31 May 2012
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With Infosys witnessing steep falls in stock price, with stagnant salaries to continue for one more year and with attrition rates to blow up, the headwind of squatty guidances has hit the bellwether company badly from all sides. In the wake of these developments, through this article, this is an analysis of a few aspects of Infosys’ financials and policies which have led to some unanswered questions.


Why didn’t CFO Mr. Balakrishnan deem it essential to burn up….?

Any company would and should take pride in maximizing profits through leverage. By leverage, I mean that you step up your revenue by x%, but your net and operating profits jump by (x+∆)% where ∆>0. But this happens only when you incur a “Fixed Cost” for your operations.


In absence of fixed costs, ∆revenue = ∆profits. It’s because of fixed costs that a 50% rise in revenue results in 80% rise in profits. Now, has the fixed cost been 4000 instead of 3000, the leveraging effect would have been better. A 50% ∆revenue could have led to 100% ∆profits, bringing leverage multiple to 2 from 1.6.

Thus, more the fixed cost, the better leverage your firm enjoys. In other words, to bring your company in a better condition, so that it enjoys better leverage, you “need” to expend some “additional” fixed cost. The moment I say “fixed” cost, it has absolutely no proportionate relation with revenues.

One such fixed cost is “Salaries”. Coming to Infosys, where the mantra to be harped upon in FY 2012-13 is to maximize profits,with financial leverage almost absent, to capitalize on operating leverage, why didn’t CFO Mr. Balakrishnan deem it essential to burn up some money on salary increments and so incur the additional fixed cost?

Has Infosys also succumbed to the trap of……?

Any company aims to earn substantially more than its cost of capital. Thus, if a firm is has missed to learn its true cost of capital, the target set for earnings and revenues is also virtual. This eventually leads to disappointing “actual earnings” and leaves the management puzzled.

Equity is often considered as a “less expensive” source of capital.

Let’s give a second thought to this. Owners carry the maximum risk, which gets accentuated by the fact that they have zero security of assets to fall back in case the company drowns tomorrow unlike the lenders which have the first preference during liquidation of company assets. More the risk more should be the returns. Following this, company is obliged to consider the “true” cost of equity much more than the rest of the sources. If the firm falters here, it gets into the trap of setting false targets and landing in trouble as mentioned above.

Infosys has been the legacy for being a zero-debt company in its sector and functioning purely based on stockholders’ money. So, the question is, Has Infosys also succumbed to the trap of underestimating cost of equity, setting stumpy guidances, pursuing and achieving them and causing shares ultimately to plummet?

One may contest this with the stand that Infosys has declared a massive 940% dividend per share this year and so has taken due care of its owners. To this, let’s understand that that the activity of maximizing shareholders’ interests is based on two legs: Paying considerable dividends and Performing such that share price in secondary market keeps on rising. What Infy has chosen to do could strengthen the first leg, but will badly knock and punch the second. And that’s what seems to be happening- the worst fall of stock in the last 3 years.

Without “directly” spending more, how can this massive asset be churned to.….?

Say a firm targets to earn 25% based on its Cost of capital calculations and has an asset size of 1000, which currently is earning 20%. To get this additional 5%, the firm may increase the asset size, but before that a wiser decision would be to check if the capabilities of these assets have been exploited to maximum. If yes, then the firm shall incur cost to acquire more assets. If not, the firm shall spend to augment productivity of existing assets. In the latter case, the firm shall prudently choose to spend money more on those assets which directly contribute to the revenue rather than spending on ancillary activities and non-performing assets which just facilitate the performing assets to perform (like furniture and transport).

Let’s understand that with the presence of NPAs, even if the asset size stands tall, the actual pressure on each unit of PA to earn 25% profit is much more (its 50% if PAs are half of total assets) than it appears and so, firm’s responsibility to keep these PAs pepped-up to perform is indispensable. For this analysis, employees are considered as assets; with reference to concept of human resource accounting.

Coming to Infosys, where an employee base of 1.5 lac is a huge performing asset, how can this massive asset be churned to contribute more to earn revenue without “directly” spending more on them? In other words, how could a “zero” salary hike enable these PAs to be more productive? Even though HR accounting is not followed commercially in India, has Infosys missed to understand that employees are its significant “Performing” Assets?

Why would an employee…….. ?

Let’s try to look at it from the perspective of the balanced scorecard:

The 4 perspectives are:

  • Financial/shareholders’ perspective
  • Customer perspective
  • Internal business processes perspective
  • Learning & growth or the people perspective

There are strong undercurrents of interdependence among the said 4 perspectives.

Since Infosys has paid its top management a total remuneration of $10.7 million (over Rs 50 crore) during the last financial year, which is a 52% increase over the last year, and has given a generous 640% dividend to its shareholders (which includes promoters too), the financial perspective is largely satiated with the hefty increments and dividends.

There is no trickle down effect from the pinnacle. The human capital of Infosys is large, and many are on bench. Hiring spree is still on, with hopes that the tide turns and projects land in heaps at the doorstep. From that point of view, providing increments in a climate of low utilization rate might not look feasible.

But what of those who are working and have been working for the past many years? It is ultimately a knowledge industry. Has the stress been more on the processes and the systems, and less on the human element? In light of the current scenario, it would certainly appear to be so. The learning and growth,or rather, the people perspective, seems to have been a low priority. It is certainly at odds with the fond remembrances of many infoscions of a people centric company and gave increments when the industry was at an all time low. Is the idea, then, to improve the process, and therein hope to compensate for an unhappy workforce, assuming that robust systems do compensate for let-down employees? That’s very unlikely.

It is important to note that demotivated employees lead eventually to an unsatisfied client. That would mean a gloomy customer perspective- especially when there is a need for more projects.

What is the take-away for an employee who has slogged it through? An infoscion who has met his objectives would anticipate monetary benefit in sync with the efforts put in. What is the motivation then, for an employee to deliver, and reach new heights when there is nothing for him/her at the summit?

Would a strong internal or business process perspective save the day along with a happy financial perspective? That is, will product design and development, along with excellent terms of customer relationship be possible to achieve without the driving force of a motivated workforce? If this were not possible, customer satisfaction dips. This would reduce the company’s performance in the market.

The key is customer retention-which will not be possible without talent retention. And, there is a war for talent. A steady stream of brain drain is not a welcome sight-not for the shareholder, certainly not for the customer and needless to say, not for fresh talent.

It all boils down to this- why would an employee strive to make the business successful, when the fruits of success are denied to him?An easy question to ask, but difficult to come up with answers, if there are any.

Infosys was the one, which kept its promise to absorb recruited candidates when the industry was gripped with job crunch in 2009, which paid salary hikes of 10% even during recession, which rolled out ESOPs in 2010, and which was uniquely efficient with excellent cash management practices.

With due credits and acknowledgement for all this to you, CFO Mr. Balakrishnan, the present speaks of a totally different picture. I am really curious to know what’s going on in your mind. Looks like either you have a big surprise to throw or you've faltered badly….

This article has been authored by Vibhu Gangal and Aparna P from SCMHRD.


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