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India Equity Research Reports, IPO and Stock News
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Key investor concerns
Over the past decade, Infosys has been a flagbearer of the Indian IT
industry and has done an outstanding job in creating value for all its
stakeholders. However, a few fault lines have emerged lately which are
worrying shareholders. Infosys’ objective of targeting growth just above
industry average and not in-line or above peers is being perceived as a
case of aiming too low. Another source of investor worry is company's
unwillingness to return any part of its $3.8 billion cash balance to its
shareholders or even spell out a roadmap for the use of its cash. A few
mishaps on the HR front, a protracted re-organisation and operational
slip-ups, all in the past 18 months have investors wondering whether
Infosys is losing its magical operational excellence. These issues are
impacting the Infosys brand, so well cultivated over the last decade.
We think these are important shareholder concerns which need to be
considered by the Infosys Management as resolution of these is
necessary for stock performance over the medium to longer term. The
details in further pages give a context to these investor worries.
Key shareholder questions to consider:
q Is targeting above-industry revenue growth (not in-line or above peers)
when tail of the industry is irrelevant, the correct strategy? While Infosys’
focus on maintaining margins is understandable and worked well in the
past, history is replete with multiple examples where loss of market share
impaired pricing power over time and ultimately led to convergence of
cost-structures and margins across companies. Investors fear that Infosys
could be headed down the same path with its current growth objectives.
q Isn’t it necessary for a cash-rich company like Infosys to articulate a clear
policy for cash usage? Accumulation of cash beyond what is required for
normal operations is diluting shareholder value. Also, the unique nature of
the IT Services industry precludes any big-bang acquisitions limiting the
use of cash for inorganic initiatives.
q Is Infosys’ extraordinary ability to manage industry-best operations and
internal HR issues blunting and is it entering the ranks of other mortal
companies? Recent slip-ups on operations, a miss of quarterly revenue
guidance in a normal demand environment and a curtailed human
resource initiative (iRACE) have hurt Infosys’ aura. Investors are worried
that the slow creep of mortality could consume Infosys.
Infosys’ internal systems are robust but operations have slipped lately raising investor doubts
Some years back, we were given a chance to walk through the internal IT systems at Infosys. We realized
the following:
Systems ensure adherence to rules. For example, no Infosys manager can allocate resources on a
project without creating a project code. The creation of a project code requires estimation of revenues and
gross margins, which need to be plugged into the system, as well as written agreements from clients, plus
management approval. This way, any special resource allocations to a client account or a project cannot
remain “hidden” or unknown.
Systems generate information with high frequency. We noted that Infosys internal systems are able to
generate gross margins per project across the thousands of live projects (6,000-7,000 at any point in time)
across the company– fortnightly. If gross margins fall below a benchmark, the system alerts top
management automatically, with a copy to project managers, who are then accountable to explain the gap.
Systems replicate the flow of the business. Instead of generating the first layer of data alone (i.e.,
revenues and gross profits), Infosys systems are able to work on core parameters, starting with billable
resources, number of people on leave, utilization, shadow resources, onsite resources etc. During our walk
around, we noticed that Infosys was in the process of identifying several allocated costs per project as well,
e.g. sales cost.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key investor concerns
Over the past decade, Infosys has been a flagbearer of the Indian IT
industry and has done an outstanding job in creating value for all its
stakeholders. However, a few fault lines have emerged lately which are
worrying shareholders. Infosys’ objective of targeting growth just above
industry average and not in-line or above peers is being perceived as a
case of aiming too low. Another source of investor worry is company's
unwillingness to return any part of its $3.8 billion cash balance to its
shareholders or even spell out a roadmap for the use of its cash. A few
mishaps on the HR front, a protracted re-organisation and operational
slip-ups, all in the past 18 months have investors wondering whether
Infosys is losing its magical operational excellence. These issues are
impacting the Infosys brand, so well cultivated over the last decade.
We think these are important shareholder concerns which need to be
considered by the Infosys Management as resolution of these is
necessary for stock performance over the medium to longer term. The
details in further pages give a context to these investor worries.
Key shareholder questions to consider:
q Is targeting above-industry revenue growth (not in-line or above peers)
when tail of the industry is irrelevant, the correct strategy? While Infosys’
focus on maintaining margins is understandable and worked well in the
past, history is replete with multiple examples where loss of market share
impaired pricing power over time and ultimately led to convergence of
cost-structures and margins across companies. Investors fear that Infosys
could be headed down the same path with its current growth objectives.
q Isn’t it necessary for a cash-rich company like Infosys to articulate a clear
policy for cash usage? Accumulation of cash beyond what is required for
normal operations is diluting shareholder value. Also, the unique nature of
the IT Services industry precludes any big-bang acquisitions limiting the
use of cash for inorganic initiatives.
q Is Infosys’ extraordinary ability to manage industry-best operations and
internal HR issues blunting and is it entering the ranks of other mortal
companies? Recent slip-ups on operations, a miss of quarterly revenue
guidance in a normal demand environment and a curtailed human
resource initiative (iRACE) have hurt Infosys’ aura. Investors are worried
that the slow creep of mortality could consume Infosys.
Infosys’ internal systems are robust but operations have slipped lately raising investor doubts
Some years back, we were given a chance to walk through the internal IT systems at Infosys. We realized
the following:
Systems ensure adherence to rules. For example, no Infosys manager can allocate resources on a
project without creating a project code. The creation of a project code requires estimation of revenues and
gross margins, which need to be plugged into the system, as well as written agreements from clients, plus
management approval. This way, any special resource allocations to a client account or a project cannot
remain “hidden” or unknown.
Systems generate information with high frequency. We noted that Infosys internal systems are able to
generate gross margins per project across the thousands of live projects (6,000-7,000 at any point in time)
across the company– fortnightly. If gross margins fall below a benchmark, the system alerts top
management automatically, with a copy to project managers, who are then accountable to explain the gap.
Systems replicate the flow of the business. Instead of generating the first layer of data alone (i.e.,
revenues and gross profits), Infosys systems are able to work on core parameters, starting with billable
resources, number of people on leave, utilization, shadow resources, onsite resources etc. During our walk
around, we noticed that Infosys was in the process of identifying several allocated costs per project as well,
e.g. sales cost.
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