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Infosys Technologies Neutral
INFY.BO, INFO IN
Progress in telecom is still gradual and measured;
marquee client account opening strategy working well
Infosys’s telecom vertical has struggled over the last few quarters; performance in
telecom has not picked up as per expectations post the downturn and has lagged
behind that of peers. We had a conversation with Mr. Subhash Dhar, Infosys’
business head for telecom. We learn that telecom spends are recovering, albeit
slowly. Growth should ensue in FY12 over FY11 but it is likely to be much lower
than company-average. In essence, we are not optimistic that telecom will help
drive revenue growth for Infosys in FY12. As in FY11, it may still substantially
sit out the growth story for FY12. More positively, Infosys continues to lead the
sector in following a targeted strategy in opening up must-have marquee accounts.
• Visibility for capex/opex recovery is still low albeit better, but order
pipeline is getting better. Infosys’ telecom vertical grew only 3% in CY10,
as clients did not release capex at the pace the company expected. Though
management expects CY11 to be better than CY10, partially due to lower
base and steadily improving pipeline, we believe that traction could still be
slow compared to the company-average. The capex recovery in the telco
segment is yet to start, which precedes opex recovery by a couple of quarters.
• Better opportunities in this vertical perhaps emanate from the cable and
wireless segments. Pricing and volume pressures are over for the telecom
segment but this does not mean that there is discernible pricing improvement.
Improved pricing accrues from better mix and greater contribution of product
development work (as opposed to IT/BPO type) which Infosys is doing on an
increasing scale for its cable clients. The wireless segment, which is the
smallest sub-segment within the telecom service provider vertical, should
present the maximum opportunity as the wireless segment is in the nascent
stage of outsourcing.
• Infosys is executing well on its must-have-account strategy. Mr. Dhar, who
also heads the sales and marketing alliance strategy of Infosys, highlighted the
growing success of Infosys’ strategy to go after clients with significant
technology spending budgets (typically Fortune-1000 or Global-1000
category). The sales cycle is long with such accounts but Infosys is
incentivizing sales to go after the "right" accounts making sales compensation
a function of the nature of accounts opened. That said, the fruits of this
strategy should play out over three to five years and not immediately.
• Investment view. We maintain our Neutral rating on Infosys. Our preferred
plays in the Indian IT sector are TCS (OW) and Wipro (OW).
Improved order pipeline, but strength of capex/opex recovery is low.
Infosys’ telecom vertical revenues grew only 3% y/y in CY10, as the clients did not
release capex at the pace the company had expected. Management believes that
CY11 should be a better year than CY10, partially due to lower base; but it does not
expect to return to the high growth rates witnessed in CY07-08. The clients are still
hesitant to release capex, more so for wireline than wireless customers. Opex, which
normally drives the monetization for IT vendors, lags capex growth by a couple of
quarters.
Hence, opex recovery still appears to be a number of quarters away. Expected
regulatory changes, primarily net neutrality, and easing challenges around
technology, should be key catalysts for spending/revenue growth.
Overall, management was slightly guarded in citing growth prospects of this vertical,
at least in the near term. The pipeline is improving but since there is no tailwind of
the current exit rates (unlike in BFSI, retail and other fast-growing verticals), growth
in this segment should significantly depend on the conversion of pipeline to
revenues.
Wireless and cable should drive incremental growth.
Traction is different across the three segments in telecom, namely, wireline, wireless
and cable. Management expects wireless and cable to drive revenue growth, but
spending in wireline segment will likely remain weak.
For Infosys, the wireline segment, by far, is the most dominant segment of the three,
but clients here are facing technological and regulatory challenges, making them
wary of initiating capex release. Interestingly, the work in cable and wireless relates
more to new product development which fetches higher pricing. This contrasts with
the wireline spending which is biased towards IT-Services/BPO and offers good
volumes but lower pricing. Also, Infosys believes that several cable/wireless
companies are at a nascent stage in outsourcing thus making this the more attractive
growth segments for telecom.
The expected mix shift towards wireless and cable should potentially be margin
accretive.
Impressive client additions so far, but it is difficult to have many client adds in
this vertical
Management pointed out that the company has added new and “right” clients over
the last few quarters, highlighted by the fact that all top 5 US cable companies and
two largest European wireless telecom operators are in the client list now. However,
it is comparatively hard to add new clients continuously in this vertical, as there are a
limited number of large telecom operators (35-40) globally.
Normally, it is seen that there are just one or two large enough telecom operators in
each country, which Infosys might want to serve. In addition, these players operate in
multiple geographies and require the vendor to be in many of these countries.
Therefore, the vendor has to increase geographical footprint to win a deal. Moreover,
although the opportunities are similar from technological standpoint for different
clients, the sales and marketing approach need to be differentiated and customized
due to cultural or language differences.
“Must-have” accounts are essential, but ‘non-must-haves’ are important too.
The company rewards the acquisition of must-have accounts, which are primarily
G1000 or Fortune1000 companies, significantly better than the other accounts.
Currently, around 80% of company revenues come from the top 100 clients and such
a lop-sided top-heavy distribution is a feature of IT-Services.
Hence, Infosys believes that “must-have” account wins are essential to grow. These
accounts have the potential to become among the company’s top100 clients over a 4-
5 years’ timeframe. On the other hand, the largest non-must have account with
Infosys still generates only $30 million in revenues, which signifies the importance
of pursuing and executing a must-have account strategy. The company does
incentivize the sales force to win other than 'must-have' clients as well, but less
attractively than ‘must-have' accounts.
Pricing pressures are a norm for this vertical, except for innovative
products/solutions.
Telecom clients are large and mature outsourcers, hence, they enjoy high bargaining
power and negotiate prices aggressively for commoditized products/solutions in good
or tough years. However, for innovative and differentiated products/solutions, the
focus shifts from price to novelty and competitive pressure is low, hence, these allow
charging premium prices. Overall, we do not expect meaningful upside in pricing for
telecom and pricing delta should remain relatively muted.
New engagement models are gaining momentum, but still relatively small
Infosys aspires to get 1/3rd of its total revenue from new engagement models,
increasing from the current proportion of 10%. The company breaks these models
into three parts – Finacle (4.0% of total revenues), platforms and products (4.5%) and
unit of work-based pricing engagements (1.5%). The new engagement pricing
models are not necessarily incremental business, as the engagement model (or the
pricing model) may change for the existing work. The proportion of work based on
these models is expected to increase, specifically ‘unit of work’ which is gaining
meaningful acceptance among clients. Some examples of “Unit of work” pricing
include transaction-based pricing in BPO, ticket-based pricing in maintenance and
element or device-based pricing in infra management. However, a mere change in the
engagement model does not guarantee stickiness of relationship with the clients. IP
based solutions together with allied services are more sticky in nature in terms of
client relationship. IP-based revenue streams (excluding Finacle) are a nascent
opportunity that Infosys has just begun tapping into. The company has developed a
number of proprietary solutions such as Flypp (for the telecom operators segment),
Shopping Trip 360 (for retailers), but traction with clients has been slow. In general,
we believe making good on an IP-led services strategy requires a product
development mindset and unique selling/partnering skills, which are in short supply
in the Indian IT Services sector.
Cloud offerings and IP-based solutions (except Finacle) are still in nascent
stages; the cloud still lack benchmarks and standardization.
Infosys’ cloud offerings, like those of competitors, are still in initial stages of
development, but these initiatives enjoy encouraging sponsorship from top
management. The company plans to establish itself as non-ISV player in this market.
However, to develop these models, the company has to follow a 'trial and error'
method, as learning occurs while experimenting due to lack of benchmarks and
standardization. Management also noted the importance of developing the ecosystem
for the maturity and development of these offerings.
Investment view
We maintain our Neutral rating on Infosys. Our preferred plays in the Indian IT
sector are TCS (OW) and Wipro (OW).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies Neutral
INFY.BO, INFO IN
Progress in telecom is still gradual and measured;
marquee client account opening strategy working well
Infosys’s telecom vertical has struggled over the last few quarters; performance in
telecom has not picked up as per expectations post the downturn and has lagged
behind that of peers. We had a conversation with Mr. Subhash Dhar, Infosys’
business head for telecom. We learn that telecom spends are recovering, albeit
slowly. Growth should ensue in FY12 over FY11 but it is likely to be much lower
than company-average. In essence, we are not optimistic that telecom will help
drive revenue growth for Infosys in FY12. As in FY11, it may still substantially
sit out the growth story for FY12. More positively, Infosys continues to lead the
sector in following a targeted strategy in opening up must-have marquee accounts.
• Visibility for capex/opex recovery is still low albeit better, but order
pipeline is getting better. Infosys’ telecom vertical grew only 3% in CY10,
as clients did not release capex at the pace the company expected. Though
management expects CY11 to be better than CY10, partially due to lower
base and steadily improving pipeline, we believe that traction could still be
slow compared to the company-average. The capex recovery in the telco
segment is yet to start, which precedes opex recovery by a couple of quarters.
• Better opportunities in this vertical perhaps emanate from the cable and
wireless segments. Pricing and volume pressures are over for the telecom
segment but this does not mean that there is discernible pricing improvement.
Improved pricing accrues from better mix and greater contribution of product
development work (as opposed to IT/BPO type) which Infosys is doing on an
increasing scale for its cable clients. The wireless segment, which is the
smallest sub-segment within the telecom service provider vertical, should
present the maximum opportunity as the wireless segment is in the nascent
stage of outsourcing.
• Infosys is executing well on its must-have-account strategy. Mr. Dhar, who
also heads the sales and marketing alliance strategy of Infosys, highlighted the
growing success of Infosys’ strategy to go after clients with significant
technology spending budgets (typically Fortune-1000 or Global-1000
category). The sales cycle is long with such accounts but Infosys is
incentivizing sales to go after the "right" accounts making sales compensation
a function of the nature of accounts opened. That said, the fruits of this
strategy should play out over three to five years and not immediately.
• Investment view. We maintain our Neutral rating on Infosys. Our preferred
plays in the Indian IT sector are TCS (OW) and Wipro (OW).
Improved order pipeline, but strength of capex/opex recovery is low.
Infosys’ telecom vertical revenues grew only 3% y/y in CY10, as the clients did not
release capex at the pace the company had expected. Management believes that
CY11 should be a better year than CY10, partially due to lower base; but it does not
expect to return to the high growth rates witnessed in CY07-08. The clients are still
hesitant to release capex, more so for wireline than wireless customers. Opex, which
normally drives the monetization for IT vendors, lags capex growth by a couple of
quarters.
Hence, opex recovery still appears to be a number of quarters away. Expected
regulatory changes, primarily net neutrality, and easing challenges around
technology, should be key catalysts for spending/revenue growth.
Overall, management was slightly guarded in citing growth prospects of this vertical,
at least in the near term. The pipeline is improving but since there is no tailwind of
the current exit rates (unlike in BFSI, retail and other fast-growing verticals), growth
in this segment should significantly depend on the conversion of pipeline to
revenues.
Wireless and cable should drive incremental growth.
Traction is different across the three segments in telecom, namely, wireline, wireless
and cable. Management expects wireless and cable to drive revenue growth, but
spending in wireline segment will likely remain weak.
For Infosys, the wireline segment, by far, is the most dominant segment of the three,
but clients here are facing technological and regulatory challenges, making them
wary of initiating capex release. Interestingly, the work in cable and wireless relates
more to new product development which fetches higher pricing. This contrasts with
the wireline spending which is biased towards IT-Services/BPO and offers good
volumes but lower pricing. Also, Infosys believes that several cable/wireless
companies are at a nascent stage in outsourcing thus making this the more attractive
growth segments for telecom.
The expected mix shift towards wireless and cable should potentially be margin
accretive.
Impressive client additions so far, but it is difficult to have many client adds in
this vertical
Management pointed out that the company has added new and “right” clients over
the last few quarters, highlighted by the fact that all top 5 US cable companies and
two largest European wireless telecom operators are in the client list now. However,
it is comparatively hard to add new clients continuously in this vertical, as there are a
limited number of large telecom operators (35-40) globally.
Normally, it is seen that there are just one or two large enough telecom operators in
each country, which Infosys might want to serve. In addition, these players operate in
multiple geographies and require the vendor to be in many of these countries.
Therefore, the vendor has to increase geographical footprint to win a deal. Moreover,
although the opportunities are similar from technological standpoint for different
clients, the sales and marketing approach need to be differentiated and customized
due to cultural or language differences.
“Must-have” accounts are essential, but ‘non-must-haves’ are important too.
The company rewards the acquisition of must-have accounts, which are primarily
G1000 or Fortune1000 companies, significantly better than the other accounts.
Currently, around 80% of company revenues come from the top 100 clients and such
a lop-sided top-heavy distribution is a feature of IT-Services.
Hence, Infosys believes that “must-have” account wins are essential to grow. These
accounts have the potential to become among the company’s top100 clients over a 4-
5 years’ timeframe. On the other hand, the largest non-must have account with
Infosys still generates only $30 million in revenues, which signifies the importance
of pursuing and executing a must-have account strategy. The company does
incentivize the sales force to win other than 'must-have' clients as well, but less
attractively than ‘must-have' accounts.
Pricing pressures are a norm for this vertical, except for innovative
products/solutions.
Telecom clients are large and mature outsourcers, hence, they enjoy high bargaining
power and negotiate prices aggressively for commoditized products/solutions in good
or tough years. However, for innovative and differentiated products/solutions, the
focus shifts from price to novelty and competitive pressure is low, hence, these allow
charging premium prices. Overall, we do not expect meaningful upside in pricing for
telecom and pricing delta should remain relatively muted.
New engagement models are gaining momentum, but still relatively small
Infosys aspires to get 1/3rd of its total revenue from new engagement models,
increasing from the current proportion of 10%. The company breaks these models
into three parts – Finacle (4.0% of total revenues), platforms and products (4.5%) and
unit of work-based pricing engagements (1.5%). The new engagement pricing
models are not necessarily incremental business, as the engagement model (or the
pricing model) may change for the existing work. The proportion of work based on
these models is expected to increase, specifically ‘unit of work’ which is gaining
meaningful acceptance among clients. Some examples of “Unit of work” pricing
include transaction-based pricing in BPO, ticket-based pricing in maintenance and
element or device-based pricing in infra management. However, a mere change in the
engagement model does not guarantee stickiness of relationship with the clients. IP
based solutions together with allied services are more sticky in nature in terms of
client relationship. IP-based revenue streams (excluding Finacle) are a nascent
opportunity that Infosys has just begun tapping into. The company has developed a
number of proprietary solutions such as Flypp (for the telecom operators segment),
Shopping Trip 360 (for retailers), but traction with clients has been slow. In general,
we believe making good on an IP-led services strategy requires a product
development mindset and unique selling/partnering skills, which are in short supply
in the Indian IT Services sector.
Cloud offerings and IP-based solutions (except Finacle) are still in nascent
stages; the cloud still lack benchmarks and standardization.
Infosys’ cloud offerings, like those of competitors, are still in initial stages of
development, but these initiatives enjoy encouraging sponsorship from top
management. The company plans to establish itself as non-ISV player in this market.
However, to develop these models, the company has to follow a 'trial and error'
method, as learning occurs while experimenting due to lack of benchmarks and
standardization. Management also noted the importance of developing the ecosystem
for the maturity and development of these offerings.
Investment view
We maintain our Neutral rating on Infosys. Our preferred plays in the Indian IT
sector are TCS (OW) and Wipro (OW).
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