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Infosys is now increasingly focussing on providing non-linear services and recruiting more local
employees onsite to reduce its dependence on visas from FY12E onwards. These measures may
have short term negative impact on margins, but we expect material positive outcomes over the
medium-long term.
Pushing non-linear delivery strongly
Infosys is now increasingly focussing on providing non-linear services and has formally
launched its new marketing strategy of partnering with clients for building organisations for
tomorrow's future around two weeks back. Infosys is looking to increasingly ramp up their
innovative and transformational service offerings alongside traditional services including
ADM, BPO and IMS.
What are they doing here?
Infosys is now increasingly looking to offer IT/BPO/IMS/transformational services with
innovative pricing models/solutions including pay per use, outcome based, per device etc.
The recent success and resulting higher demand from its clients is driving this push. Infosys
currently provides services on cloud (including solutions and tools in Telecom, Retail, BFSI,
Social Networking, Healthcare besides providing platform offerings relating to HRO/Telecom
applications etc.) and services for cloud (including consulting, migration services to enable
clients to move to cloud technologies as well as partnering with SAP and Oracle for their on
demand services).
Why are they doing this?
Infosys believes that this would lead to competitive advantage as this is win-win for clients.
Considering increasing trend of pricing pressure on traditional support and maintenance work
from clients, Infosys is looking to build scale in innovative service delivery models which will
increase its margins over medium to long term. Secondly these delivery models are helping
clients to reduce its total cost of ownership of IT with more business value visible to clients
with these innovative models. Therefore Infosys's clients are increasingly demanding more of
such services.
Where have they reached so far?
Currently Infosys derives 11% of its revenues from innovative non-linear delivery models
(including ~5% of revenues from banking product suite). Close to half of the active clients
(612 active clients at the end of 3QFY11) have started using these innovative methods of
delivery from Infosys. Due to clients' increasing demand, the management is now increasingly
looking on investing and marketing these initiatives.
Will this impact margins?
These investment were started by Infosys 1-2 years ago (which lead to this scale up), but
FY12E may be the first year to ramp up these investment to higher scale and may have some
short-term impact on margins. We believe that these investments are unlikely captured in
consensus EPS estimates but Infosys can afford such investments where scale up in medium
to long term on revenues can lead to bigger positive surprises on margins. Even in short term,
assuming 50bp impact on margin through these investments in FY12E (equivalent to
investment of ~US$40mn), Infosys can deploy an additional strength of +1000 employees in
India with more than three years experience (assuming 75% of these investment would be
towards India based manpower cost) is material for such initiatives. We believe that currently
Infosys already has +2000 employees working on platform/non-linear offerings besides +5700
employees for its banking product. Therefore, we believe that such investment at Infosys's
scale is likely to be significantly long-term positive despite some short-term margin impact.
We also believe that despite these investment impacting margins in short term,
management's consistent focus on industry leading margins is likely to continue and therefore
the pace of the investment would be dependent on the growth in revenues which would arrest
any significant negative surprise on margins even in the short term.
Are these initiatives are driven by competition?
Management believes that this has nothing to do with competition as this is driven more as
innovation and rising demand from clients as half of the clients of Infosys have started using
this method of delivery from Infosys (active client base of Infosys is 612, meaning average
revenues from these initiatives excluding banking product is around $1mn per client, which
according to us is a very strong start both in terms of wide acceptance and average scale up
per client). These initiatives are the steps forward for achieving the company's vision of 33%
of consolidated revenues from non-linear delivery models over next 3-5 years.
Details regarding increasing local hiring are as follows:
Infosys is also looking to increase the strength of local employees within onsite locations
especially in US from FY12E onwards. This move is towards lowering the dependence on
H1B/L1 visas. Infosys is also looking to recruit 500 senior consultants in US and Europe in
FY12E and FY13E each with 125 senior consultants already recruited. We believe that salary
differentials amongst employees (with 3-6 years experience band) with H1B/L1 visas and
local US citizens are not material. However increasing ratio of local employees within onsite
strength can put up pressure on onsite utilisation (every 1% change in onsite utilisation would
impact EBITDA margins by 30-40bp) with reducing flexibility to manage the onsite bench.
However in medium-long term these initiatives would reduce the visa as well as travel cost.
May have short-term impact but will have material long-term benefit
Overall we believe that Infosys's increasing focus on non-linear investment and recruitment of
local employees (within onsite locations) from FY12E may lead to some negative surprises on
FY12 rupee EPS guidance (to be announced in April 2011), however in medium-long term,
we believe that these initiatives would be revenue and margin accretive and could throw
material positive surprises on EPS. We are not revising our estimates as we await more
details and we continue to believe that headroom for managing margin pressure/investments
for Infosys is higher versus peers while entering FY12E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys is now increasingly focussing on providing non-linear services and recruiting more local
employees onsite to reduce its dependence on visas from FY12E onwards. These measures may
have short term negative impact on margins, but we expect material positive outcomes over the
medium-long term.
Pushing non-linear delivery strongly
Infosys is now increasingly focussing on providing non-linear services and has formally
launched its new marketing strategy of partnering with clients for building organisations for
tomorrow's future around two weeks back. Infosys is looking to increasingly ramp up their
innovative and transformational service offerings alongside traditional services including
ADM, BPO and IMS.
What are they doing here?
Infosys is now increasingly looking to offer IT/BPO/IMS/transformational services with
innovative pricing models/solutions including pay per use, outcome based, per device etc.
The recent success and resulting higher demand from its clients is driving this push. Infosys
currently provides services on cloud (including solutions and tools in Telecom, Retail, BFSI,
Social Networking, Healthcare besides providing platform offerings relating to HRO/Telecom
applications etc.) and services for cloud (including consulting, migration services to enable
clients to move to cloud technologies as well as partnering with SAP and Oracle for their on
demand services).
Why are they doing this?
Infosys believes that this would lead to competitive advantage as this is win-win for clients.
Considering increasing trend of pricing pressure on traditional support and maintenance work
from clients, Infosys is looking to build scale in innovative service delivery models which will
increase its margins over medium to long term. Secondly these delivery models are helping
clients to reduce its total cost of ownership of IT with more business value visible to clients
with these innovative models. Therefore Infosys's clients are increasingly demanding more of
such services.
Where have they reached so far?
Currently Infosys derives 11% of its revenues from innovative non-linear delivery models
(including ~5% of revenues from banking product suite). Close to half of the active clients
(612 active clients at the end of 3QFY11) have started using these innovative methods of
delivery from Infosys. Due to clients' increasing demand, the management is now increasingly
looking on investing and marketing these initiatives.
Will this impact margins?
These investment were started by Infosys 1-2 years ago (which lead to this scale up), but
FY12E may be the first year to ramp up these investment to higher scale and may have some
short-term impact on margins. We believe that these investments are unlikely captured in
consensus EPS estimates but Infosys can afford such investments where scale up in medium
to long term on revenues can lead to bigger positive surprises on margins. Even in short term,
assuming 50bp impact on margin through these investments in FY12E (equivalent to
investment of ~US$40mn), Infosys can deploy an additional strength of +1000 employees in
India with more than three years experience (assuming 75% of these investment would be
towards India based manpower cost) is material for such initiatives. We believe that currently
Infosys already has +2000 employees working on platform/non-linear offerings besides +5700
employees for its banking product. Therefore, we believe that such investment at Infosys's
scale is likely to be significantly long-term positive despite some short-term margin impact.
We also believe that despite these investment impacting margins in short term,
management's consistent focus on industry leading margins is likely to continue and therefore
the pace of the investment would be dependent on the growth in revenues which would arrest
any significant negative surprise on margins even in the short term.
Are these initiatives are driven by competition?
Management believes that this has nothing to do with competition as this is driven more as
innovation and rising demand from clients as half of the clients of Infosys have started using
this method of delivery from Infosys (active client base of Infosys is 612, meaning average
revenues from these initiatives excluding banking product is around $1mn per client, which
according to us is a very strong start both in terms of wide acceptance and average scale up
per client). These initiatives are the steps forward for achieving the company's vision of 33%
of consolidated revenues from non-linear delivery models over next 3-5 years.
Details regarding increasing local hiring are as follows:
Infosys is also looking to increase the strength of local employees within onsite locations
especially in US from FY12E onwards. This move is towards lowering the dependence on
H1B/L1 visas. Infosys is also looking to recruit 500 senior consultants in US and Europe in
FY12E and FY13E each with 125 senior consultants already recruited. We believe that salary
differentials amongst employees (with 3-6 years experience band) with H1B/L1 visas and
local US citizens are not material. However increasing ratio of local employees within onsite
strength can put up pressure on onsite utilisation (every 1% change in onsite utilisation would
impact EBITDA margins by 30-40bp) with reducing flexibility to manage the onsite bench.
However in medium-long term these initiatives would reduce the visa as well as travel cost.
May have short-term impact but will have material long-term benefit
Overall we believe that Infosys's increasing focus on non-linear investment and recruitment of
local employees (within onsite locations) from FY12E may lead to some negative surprises on
FY12 rupee EPS guidance (to be announced in April 2011), however in medium-long term,
we believe that these initiatives would be revenue and margin accretive and could throw
material positive surprises on EPS. We are not revising our estimates as we await more
details and we continue to believe that headroom for managing margin pressure/investments
for Infosys is higher versus peers while entering FY12E.
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