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Infosys Technologies Neutral
INFY.BO, INFO IN
Manufacturing vertical is humming well on the back of
distinctive positioning and revival of IT spending
• Infosys has a strong, differentiated competitive positioning in the
manufacturing vertical. Revenue growth in this vertical has been impressive
in FY09 at 50%, above-company average in YTD FY11 at 24%, signifying
the consistency of performance. How are the dynamics in this vertical
playing out in CY11 and is Infosys likely to repeat this performance in
CY11/FY12 as well? We spoke to Mr. B.G. Srinivas who heads
Manufacturing, Product development and Europe for Infosys. Our impression
is that the advantage Infosys enjoys in this vertical is likely to sustain in
CY11. Together with BFSI and retail, manufacturing would help Infosys meet
consensus USD revenue growth expectations of near-25% in FY12.
• Value-add in the manufacturing vertical is high and competitive intensity
is low. Infosys’ penetration in manufacturing is characterized by a relatively
high degree of consulting and enterprise solutions and higher-order
transformation-type engagements. About 40% of manufacturing revenues
accrues from consulting and enterprise solutions and transformation. In fact,
in some manufacturing clients, this is higher than 50%. This contributes to
higher billing rates than peers at above company-average margins. Also,
Infosys sees competition from offshore peers (TCS/Wipro/Cognizant) as
being very limited and sees competition in manufacturing/Europe coming
from global system integrators such Accenture and IBM. We believe that
manufacturing and to a lesser extent retail are two verticals wherein
Infosys still enjoys premium pricing status. As we have pointed out earlier,
this has likely diminished in the more competitive, "crowded" verticals such as
financial services and telecom.
• Product engineering (both traditional engineering outsourcing and R&D)
making a comeback. Infosys believes that with outsourced R&D spends
picking up, product engineering as a segment should outgrow IT-Services in
CY11. This will help margins in manufacturing as this tends to be much more
offshore-centric in nature than traditional IT at more favorable billing rates.
• Country-specific structures in Germany, France and Switzerland are
helping gather traction. Given the heavy localization needed in such
markets, deploying a completely verticalised structure is less productive.
Infosys has built out its own sales force, technology consultants, selective
delivery structure and support staff specifically for these geographies.
• Investment view. We maintain our Neutral rating on Infosys. We prefer TCS
(OW) and Wipro (OW).
Manufacturing vertical should continue to exhibit above average and abovepeer
growth.
Infosys has performed significantly better than peers in manufacturing vertical, and
continued to grow revenues meaningfully (with an exception of a few quarters)
through the downturn, while competitors were struggling. Revenue growth in this
vertical was impressive in FY09 at 50%, and above-company average in YTD FY11
at 24%, signifying the consistency of performance. Management asserted that the
investments made in building solutions using enterprise solutions and transformation
roll-outs are paying dividends, allowing the company to provide differentiated
products/solutions to the customers (particularly for transformation type of deals).
Component of value-add in manufacturing is high while competition is
relatively less intense. About 40% of manufacturing revenues accrues from
consulting and enterprise solutions and transformation. In fact, in some
manufacturing clients, the proportion of these service lines is higher than 50%. This
contributes to higher billing rates than peers at above company-average margins.
Also, Infosys sees competition from offshore peers (TCS/Wipro/Cognizant) as being
very limited and sees competition in manufacturing/Europe coming from global
system integrators such Accenture and IBM. We believe that manufacturing and to a
lesser extent retail are two verticals wherein Infosys still enjoys premium pricing
status. As we have pointed out earlier, this has likely diminished in the more
competitive, "crowded" verticals such as financial services and telecom.
The company recognizes the changing landscape in the marketplace, where IT
vendors are expected to partner with the client, and have to gauge the impact of
different issues (such as macro, pervasive computing, digital consumer etc.) on
client’s business, so that it can provide consulting and solutions accordingly. Due to
the given factors, Infosys is well placed competitively to garner benefits from the
improving demand in various manufacturing sub-segments
In terms of demand, manufacturing clients are increasingly willing to spend on
simplification and standardization of processes, i.e. transformation type of spend.
Pent up demand is coming back for upgrading legacy systems (or what we refer to as
"legacy modernization").
All the sub-segments in growth mode with revival more strongly seen in auto
and aerospace. There is renewed activity in auto and commercial aerospace markets,
which were dormant during the downturn, and this is true for both Europe and the
US. High-tech is also looking up, while resources growth is steady as well. Modest
recovery in discrete manufacturing is visible, but growth here is expected to be
relatively slow. Overall, management expects the manufacturing vertical to grow
well, particularly transformation business, ahead of company average and similar
business of peers.
High credibility and lesser competition allows for premium pricing in Europe.
Infosys has managed to charge above average prices in the region. Management
attributes this to its early mover advantage and established credibility in enterprise
solutions- and transformation-led engagements. In Europe, outsourcing is not as
mature a phenomenon as in the US; and the clients are more concerned about the
credibility of the IT vendor than marginally higher prices. Infosys had moved into the
region ahead of peers and enjoys better credibility, allowing it to charge premium
prices. Moreover, the market is less crowded than other mature markets, particularly
in Continental Europe. The higher proportion of high margin consulting, enterprise
solutions and infra management business is also positive for pricing.
Infosys does not encounter many European competitors except Cap Gemini and to
some extent T-Systems. The primary competition is with MNCs such as IBM,
Accenture and to a lesser extent Cap Gemini. Other Indian IT vendors do not have
meaningful presence in this market. Moreover, the market is still small and the pie is
increasing feeding revenue growth for all the companies, admittedly off a small base.
Focusing on Continental Europe, primarily France, Germany and Switzerland.
Infosys has organization structure in place for these markets and continues to invest
in building capabilities, vertical experience and domain knowledge for the region,
which admittedly is a slow exercise. Management pointed out that they are getting
calls from clients to discuss opportunities, which were not there 4-5 years ago. Both,
transformation and business-as-usual kind of deals are available. The company is
customizing already available solutions and building new capabilities specifically
focused on these markets. It is building out point solutions specifically geared to
such markets using the matrix structure (combining locals and specific geography
consultants with the firepower of industry domain experts who are more vertically
aligned).
To better target the client base, the company is doing local recruitment. Interestingly,
the onshore offshore mix is not significantly tilted towards onshore as its proportion
is slightly higher than 30%, which is a normal level for IT services industry. Mr.
Srinivas suggested that mix is more determined by the nature of service lines than
geography e.g. it should be higher for system integration than for an application
management/BPO kind of deal.
In terms of organization structure, the company has formed normal hybrid
structure for the region, so that it can leverage expertise across verticals and
horizontals. Revenue share structure is in place for horizontals and verticals. As the
company achieves critical mass, management can decide which axis should be
focused on.
Localization is taking place in Switzerland as well, along with Germany and France.
Management noted that, interestingly, Switzerland is a bigger market in terms of
revenue share. It might be partially because of the reason that Switzerland is more
cosmopolitan in nature and is a relatively mature market for offshoring than some
other countries in continental Europe. The company does not have a complete
structure there yet, but has reasonable presence.
Drivers for increased product engineering spends are coming to the fore.
Product engineering business originates from the R&D and engineering spend, which
is very lumpy in nature compared to regular operations kind of business. R&D and
engineering spend decreases very steeply during tough environment with a lag time.
Clients also take a longer thinking time to re-initiate engineering spend. Hence,
uptick should be with a lag as well.
Clients have cutback on R&D spend over the last 18-20 months. Interestingly,
customers do not do R&D work inside the organization like some other processes,
but stop it completely during tough times, so when environment improves they start
investing to catch-up to build competitiveness. The company is already witnessing
traction in product life cycle and product costing type of business. Hence,
management is optimistic about the space for the future quarters and expects to
maintain marginally higher than company average growth rates.
On the supply side, employees are required to have technical expertise for this
service line, but not necessarily computer science graduate, but mechanical graduates
also, who can better understand and perform the product life cycle management type
of work. The pyramid does exist for this horizontal as well with only marginal
tweaks from regular ADM kind of business.
The company breaks down the work structure in product engineering partitioning it
by criticality and can build capabilities around core/critical and non-critical (noncore)
components. It is possible to roll out templates and industrialization in noncore,
standardizable components of product engineering. The offshore onshore mix is
around 80/20 for this horizontal by effort, resulting in slightly higher margins than
for other service lines.
Co-creation – a new model to engage client at the highest level.
Infosys has stepped up emphasis on the initiative called Co-creation, which includes
a two-day workshop with the top management of client/prospective client, including
the CEO of the company. Both the parties brainstorm regarding product development
for the transformation of the business (including the seven themes of digital
consumers, sustainability, healthcare economy, emerging markets, new commerce,
smarter organization and pervasive computing). The team starts with a broader
approach, without any industry specific orientation, so that IT vendor’s
expertise/innovation in other sectors can also be brought into play. Later the
conversation focuses on the specific industry and organization. The outcome of the
workshop can be a blue print for the transformation process.
Other notable points
• Infosys is willing to invest in data centres, when market for its identified
platform service business opens up meaningfully. The company is ready to
do hosting if the opportunity is sizable. There are early signs of growth, but
the scale is not large enough for a company of Infosys' size yet to invest in
owning its data-centres.
• In resources sector, the growth is hindered by two-vendor structure, which
includes one local player and one offshore vendor. The client outsources
low-end, low margin processes to the offshore vendor, but keeps the critical
processes within the geography with local vendors. Hence, resources clients
are yet to develop an integrated view on outsourcing and the mindset needs
to be changed.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies Neutral
INFY.BO, INFO IN
Manufacturing vertical is humming well on the back of
distinctive positioning and revival of IT spending
• Infosys has a strong, differentiated competitive positioning in the
manufacturing vertical. Revenue growth in this vertical has been impressive
in FY09 at 50%, above-company average in YTD FY11 at 24%, signifying
the consistency of performance. How are the dynamics in this vertical
playing out in CY11 and is Infosys likely to repeat this performance in
CY11/FY12 as well? We spoke to Mr. B.G. Srinivas who heads
Manufacturing, Product development and Europe for Infosys. Our impression
is that the advantage Infosys enjoys in this vertical is likely to sustain in
CY11. Together with BFSI and retail, manufacturing would help Infosys meet
consensus USD revenue growth expectations of near-25% in FY12.
• Value-add in the manufacturing vertical is high and competitive intensity
is low. Infosys’ penetration in manufacturing is characterized by a relatively
high degree of consulting and enterprise solutions and higher-order
transformation-type engagements. About 40% of manufacturing revenues
accrues from consulting and enterprise solutions and transformation. In fact,
in some manufacturing clients, this is higher than 50%. This contributes to
higher billing rates than peers at above company-average margins. Also,
Infosys sees competition from offshore peers (TCS/Wipro/Cognizant) as
being very limited and sees competition in manufacturing/Europe coming
from global system integrators such Accenture and IBM. We believe that
manufacturing and to a lesser extent retail are two verticals wherein
Infosys still enjoys premium pricing status. As we have pointed out earlier,
this has likely diminished in the more competitive, "crowded" verticals such as
financial services and telecom.
• Product engineering (both traditional engineering outsourcing and R&D)
making a comeback. Infosys believes that with outsourced R&D spends
picking up, product engineering as a segment should outgrow IT-Services in
CY11. This will help margins in manufacturing as this tends to be much more
offshore-centric in nature than traditional IT at more favorable billing rates.
• Country-specific structures in Germany, France and Switzerland are
helping gather traction. Given the heavy localization needed in such
markets, deploying a completely verticalised structure is less productive.
Infosys has built out its own sales force, technology consultants, selective
delivery structure and support staff specifically for these geographies.
• Investment view. We maintain our Neutral rating on Infosys. We prefer TCS
(OW) and Wipro (OW).
Manufacturing vertical should continue to exhibit above average and abovepeer
growth.
Infosys has performed significantly better than peers in manufacturing vertical, and
continued to grow revenues meaningfully (with an exception of a few quarters)
through the downturn, while competitors were struggling. Revenue growth in this
vertical was impressive in FY09 at 50%, and above-company average in YTD FY11
at 24%, signifying the consistency of performance. Management asserted that the
investments made in building solutions using enterprise solutions and transformation
roll-outs are paying dividends, allowing the company to provide differentiated
products/solutions to the customers (particularly for transformation type of deals).
Component of value-add in manufacturing is high while competition is
relatively less intense. About 40% of manufacturing revenues accrues from
consulting and enterprise solutions and transformation. In fact, in some
manufacturing clients, the proportion of these service lines is higher than 50%. This
contributes to higher billing rates than peers at above company-average margins.
Also, Infosys sees competition from offshore peers (TCS/Wipro/Cognizant) as being
very limited and sees competition in manufacturing/Europe coming from global
system integrators such Accenture and IBM. We believe that manufacturing and to a
lesser extent retail are two verticals wherein Infosys still enjoys premium pricing
status. As we have pointed out earlier, this has likely diminished in the more
competitive, "crowded" verticals such as financial services and telecom.
The company recognizes the changing landscape in the marketplace, where IT
vendors are expected to partner with the client, and have to gauge the impact of
different issues (such as macro, pervasive computing, digital consumer etc.) on
client’s business, so that it can provide consulting and solutions accordingly. Due to
the given factors, Infosys is well placed competitively to garner benefits from the
improving demand in various manufacturing sub-segments
In terms of demand, manufacturing clients are increasingly willing to spend on
simplification and standardization of processes, i.e. transformation type of spend.
Pent up demand is coming back for upgrading legacy systems (or what we refer to as
"legacy modernization").
All the sub-segments in growth mode with revival more strongly seen in auto
and aerospace. There is renewed activity in auto and commercial aerospace markets,
which were dormant during the downturn, and this is true for both Europe and the
US. High-tech is also looking up, while resources growth is steady as well. Modest
recovery in discrete manufacturing is visible, but growth here is expected to be
relatively slow. Overall, management expects the manufacturing vertical to grow
well, particularly transformation business, ahead of company average and similar
business of peers.
High credibility and lesser competition allows for premium pricing in Europe.
Infosys has managed to charge above average prices in the region. Management
attributes this to its early mover advantage and established credibility in enterprise
solutions- and transformation-led engagements. In Europe, outsourcing is not as
mature a phenomenon as in the US; and the clients are more concerned about the
credibility of the IT vendor than marginally higher prices. Infosys had moved into the
region ahead of peers and enjoys better credibility, allowing it to charge premium
prices. Moreover, the market is less crowded than other mature markets, particularly
in Continental Europe. The higher proportion of high margin consulting, enterprise
solutions and infra management business is also positive for pricing.
Infosys does not encounter many European competitors except Cap Gemini and to
some extent T-Systems. The primary competition is with MNCs such as IBM,
Accenture and to a lesser extent Cap Gemini. Other Indian IT vendors do not have
meaningful presence in this market. Moreover, the market is still small and the pie is
increasing feeding revenue growth for all the companies, admittedly off a small base.
Focusing on Continental Europe, primarily France, Germany and Switzerland.
Infosys has organization structure in place for these markets and continues to invest
in building capabilities, vertical experience and domain knowledge for the region,
which admittedly is a slow exercise. Management pointed out that they are getting
calls from clients to discuss opportunities, which were not there 4-5 years ago. Both,
transformation and business-as-usual kind of deals are available. The company is
customizing already available solutions and building new capabilities specifically
focused on these markets. It is building out point solutions specifically geared to
such markets using the matrix structure (combining locals and specific geography
consultants with the firepower of industry domain experts who are more vertically
aligned).
To better target the client base, the company is doing local recruitment. Interestingly,
the onshore offshore mix is not significantly tilted towards onshore as its proportion
is slightly higher than 30%, which is a normal level for IT services industry. Mr.
Srinivas suggested that mix is more determined by the nature of service lines than
geography e.g. it should be higher for system integration than for an application
management/BPO kind of deal.
In terms of organization structure, the company has formed normal hybrid
structure for the region, so that it can leverage expertise across verticals and
horizontals. Revenue share structure is in place for horizontals and verticals. As the
company achieves critical mass, management can decide which axis should be
focused on.
Localization is taking place in Switzerland as well, along with Germany and France.
Management noted that, interestingly, Switzerland is a bigger market in terms of
revenue share. It might be partially because of the reason that Switzerland is more
cosmopolitan in nature and is a relatively mature market for offshoring than some
other countries in continental Europe. The company does not have a complete
structure there yet, but has reasonable presence.
Drivers for increased product engineering spends are coming to the fore.
Product engineering business originates from the R&D and engineering spend, which
is very lumpy in nature compared to regular operations kind of business. R&D and
engineering spend decreases very steeply during tough environment with a lag time.
Clients also take a longer thinking time to re-initiate engineering spend. Hence,
uptick should be with a lag as well.
Clients have cutback on R&D spend over the last 18-20 months. Interestingly,
customers do not do R&D work inside the organization like some other processes,
but stop it completely during tough times, so when environment improves they start
investing to catch-up to build competitiveness. The company is already witnessing
traction in product life cycle and product costing type of business. Hence,
management is optimistic about the space for the future quarters and expects to
maintain marginally higher than company average growth rates.
On the supply side, employees are required to have technical expertise for this
service line, but not necessarily computer science graduate, but mechanical graduates
also, who can better understand and perform the product life cycle management type
of work. The pyramid does exist for this horizontal as well with only marginal
tweaks from regular ADM kind of business.
The company breaks down the work structure in product engineering partitioning it
by criticality and can build capabilities around core/critical and non-critical (noncore)
components. It is possible to roll out templates and industrialization in noncore,
standardizable components of product engineering. The offshore onshore mix is
around 80/20 for this horizontal by effort, resulting in slightly higher margins than
for other service lines.
Co-creation – a new model to engage client at the highest level.
Infosys has stepped up emphasis on the initiative called Co-creation, which includes
a two-day workshop with the top management of client/prospective client, including
the CEO of the company. Both the parties brainstorm regarding product development
for the transformation of the business (including the seven themes of digital
consumers, sustainability, healthcare economy, emerging markets, new commerce,
smarter organization and pervasive computing). The team starts with a broader
approach, without any industry specific orientation, so that IT vendor’s
expertise/innovation in other sectors can also be brought into play. Later the
conversation focuses on the specific industry and organization. The outcome of the
workshop can be a blue print for the transformation process.
Other notable points
• Infosys is willing to invest in data centres, when market for its identified
platform service business opens up meaningfully. The company is ready to
do hosting if the opportunity is sizable. There are early signs of growth, but
the scale is not large enough for a company of Infosys' size yet to invest in
owning its data-centres.
• In resources sector, the growth is hindered by two-vendor structure, which
includes one local player and one offshore vendor. The client outsources
low-end, low margin processes to the offshore vendor, but keeps the critical
processes within the geography with local vendors. Hence, resources clients
are yet to develop an integrated view on outsourcing and the mindset needs
to be changed.
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