Infosys: What Went Wrong?

Posted in Operations & IT Articles, Total Reads: 6244 , Published on 08 March 2012
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Not so long ago, I used to hear long debates about ‘TCS v/s Infosys’ in the long hallows, lawns and in the buses of my engineering college. Most of the times, TCS came out victorious among those debates versus Infy much to my disappointment.  Although being a computer engineer, I never got attracted towards TCS, the biggest exporter of IT in the world and currently the most valued company of the country after toppling RIL in the last moments of 2011. On the other hand, Infosys had always caught my close attention, be it the first engineer from our family got placed there long back in 2001-02, when I hardly understood the meaning of computers and engineering or my respect and fondness for the self-made man, its former CEO Mr. Narayan Murthy.

Infosys, What went wrong

True fans never quit. It’s not a reference to the fans of Indian Cricket team supporting even against the lackluster performance in Australia; rather it’s me who continues to believe in Infosys, against their lackluster performance in 2011. That’s why after the Q3 results declared in mid-January and again negative sentiments flowing from investors and analysts , I decided to write a piece.

The Arch-Rivals:

Indian IT has majorly dominated by few firms , the age old TCS, Infosys and ever green WIPRO. Although recent times has seen a lot more change in that hierarchy after entry of Cognizant in top 3 and table toppling performance by small players such as HP India and HCL . But the top 2 rivals have been hardly challenged since their inception until the recent times.

The traditional rivals have logged head once again, but recently the older one is running away with a huge gap in between. TCS is being more bold in its practices and rather accumulating its cashes for the bad days in future, it is making more acquisitions to strengthen its position in emerging markets. In the mean time its arch rival owing to its fragile management and less aggressive approach is walking cautiously . The aggressive approach has also rewarded the TATA group’s influential member with huge returns this financial year with a 4% growth on QOQ basis.  A comparison of both the firms is shown below focusing on major financial parameters.

Comparison

The study shows that on almost all basic parameters Infy is lagging behind TCS, be it market cap, HR resources or EPS. This has also affected the share trading pattern in BSE. A trend in the early 2011 is shown below which also included the phase of leadership crisis and restructuring at its organization level.

Infosys TCS chart

Infy's sequential revenue growth lagged behind that of TCS and HCL seven of the last 13 quarters to December 2011 and operating profit growth lagged six times. Following its lackluster performance relative to peers, Infosys has been reporting a gradual downward revision in its stock valuation. It has also lost the status of IT stock with the highest price-earnings multiple (P/E) to TCS, the country's largest IT exporter.

Gaps closing in: Infosys &Cognizant:

After piping WIPRO as 3rd major IT company of the country in the quarter ended June 2011, Cognizant is all set to eclipse past the 2nd best, Infosys.  The recent quarter performance has also strengthened this argument since Infosys is lagging behind Cognizant in several specific areas, most notably in its own revenue driver; BFSI sectors.  After losing leadership in the telecom vertical, the company is likely to concede leadership in North American revenues to Cognizant.

What went wrong?

Really I wonder, what went wrong for such an organization which remained entrepreneurial in nature for such a long time , with such a robust management and a huge cash reserves.

Infosys faced everything which could go wrong just in one and half financial years.  Some of them are demystified below,-

Reorganization & Instability at the level of C-management

Infy felt the same tremors as the Indian Cricket Team will now experience after the fab four will retire.  Retirement of Mr. Murthy, Mr. Nilekani’s early departure was traumatic for the company amidst recessions and slow growth phase and finally, resignation of HR head Mr. Pai acted as the final nail on the coffin. Newly appointed CEO Mr. Sibulal is a veteran and capable person to drive the company to its old glory, but for outsiders and investors; he was not a known figure to rely upon. Even, the secondary management felt the presence of weak links in the top management.

The reorganization that came under new power was highly untimely. TCS restructured it in the phases of economic turmoil in 2008 and it took some years to take off.  And this was the year to reap its benefits. As always, Infy followed its arch rival, but it was pretty late and ill timed.

Defensive Tactics :

Infosys is viewed in the industry as very conservative, because though it has nearly $4 billion of surplus cash, it has not made any acquisitions in the past few years, except the relatively small acquisition of McCamish Solutions in 2009. In comparison, companies such as TCS and HCL have been fairly acquisitive, which has promoted their growth .

The largest pillar tumbling :

The largest segment of Infosys i.e. BFSI (financial services and insurance) vertical of the company appears to be more and more stressed. While, this sector remains the major contributor to Infy’s revenues, but recent developments show it is crawling behind TCS & Cognizant. BFSI, which comprises of 35.3 % of its revenues, increased just by 3.4 % and 11 % year on year which is quite sluggish compared to its average growth.

HR policies: Are they ideal any more?

The 2nd largest IT giant of the nation , which once was famous for its entrepreneurial nature and attracted young talents throughout the nation due to its innovative  and employee focused HR practices in early 00’s is perhaps seating far down in employee satisfaction index.

Poor recruitment planning. Increasing tension over wage rise in the upper management has resulted in a huge bench for Infosys. Although bench strength is one of the parameters of strength for any IT industry, it’s hurting more to the company due to lack of projects and increase in wages in recent times.

Opportunity Lost :

2011 was a year made for IT industry in India. Huge inflation and consequently depreciation of rupees allowed the industry titans to revive their old glory after a tumultuous phase of recession and slow down. Relative stability in US also ensured increased spend in the IT budget of many corporations. But, the frictions resulting from structural reorganization and a new management didn’t let Infy to score at will as other giants such as TCS, Cognizant did. This was quite evident from their expected 1% rise in net revenue as against over 4 % expected increase in exports in dollar terms.

Consulting:  Nowhere in the map:

The reorganization segregated its business into four major verticals, BFSI, retail, manufacturing and life sciences in addition to communications and energy utilization. But, consulting in general was nowhere in its long term strategy.  Time & Material based services continue to dominate in its revenue distribution rather than fixed material prices based service. While, TCS and Cognizant are strengthening their foothold in the consulting map of India, Infosys is far behind in this crucial sector which drives further to development and execution of IT services.

We Want more : Analysts

We can’t say Infosys performed horribly. Rather its Q3 performance matched its expectations made in the 2nd quarter and promises a fair performance in the final quarter. Despite its fair performance at least in the final quarter, analysts termed it as mediocre/ neutral rather than good/positive, which drove investor sentiments which finally resulted in a decrease in share prices.

H-Club : Rise of HP & HCL

After the dream run of jumbled letters of ‘T’,’C’,’S’;it was the time for two small players to riseand shine. HP India outperformed all Wipro, Cognizant and CTS to rise to the 2nd best performer in the Annual Dataquest Survey for best 20 IT companies of India. The rise of HCL is also phenomenal in this year which jumped 12 positions tobecome  34th best IT company throughout the world. while Infosys was just shying away with 27th position overally.

The Top 20

1

TCS

2

Infosys

3

Wipro

4

Hewlett-Packard India

5

Cognizant Technology Solutions

6

IBM India

7

HCL Technologies

8

HCL Info systems

9

Ingram Micro India

10

Redington India

11

Cisco Systems India

12

Oracle India

13

Dell India

14

Intel India

15

Accenture India

16

SAP India

17

Mahindra Satyam

18

Tech Mahindra

19

Microsoft India

20

MphasiS

Src :  Dataquest Survey 2011.

2012: Mystery Continues:

What lies ahead for the 2nd biggest company in 2012?

The reorganization is gaining stability and the market has shown a lot more promise in the early days of the year. Q3 results are encouraging and promising although market sentiments are negative.  Although Cognizant is fast approaching its tail and a fast strengthening rupee poses as threats to the revenues and accounts receivables this year, but I believe, Infy will evolve, the dimensions of that evolution only remain uncertain.

This article has been authored by Biswajeet Malik from IIM Indore

Image: renjith krishnan / FreeDigitalPhotos.net


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