Infosys 3.0's mantra seems to be complete verticalization, but this will present initial challenges :: JP Morgan

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Infosys Technologies
Neutral
INFY.BO, INFO IN
Infosys 3.0's mantra seems to be complete
verticalization, but this will present initial challenges


• Infosys provided further color on its new organizational structure from the
service line angle. The company has consolidated its operations into three
service lines, which include business transformation, operation and
innovation. Business transformation will comprise consulting, system
integration, enterprise solution and some part of ADM (application
development and maintenance), and it will be headed by Stephen Pratt.
Business operations, to be headed by Chandra Shekar Kakal, will include the
recurring part of ADM, testing, infrastructure management and a part of
business process management. Business operations account for 65% of Infosys’
revenues. Subhash Dhar will head business innovation, which will include
products, platforms, solutions, accelerators and co-creation solutions. Mobility,
cloud and sustainability will be stand alone business units to be incubated at the
central level as these are in nascent stages without critical mass.

• Verticalization of service lines and geographies, including ROW, is a
positive in our view, but not without near-term challenges. It will help
Infosys to present a unified front to clients as regards delivery and sales. The
SMEs (subject matter experts) or pre-sales experts will be a part of specific
verticals leading to sub-specialization; hence the company might need to hire
more SMEs as they are henceforth vertically aligned. In keeping with this,
Infosys might need to make near-term investments in its SME team. Likewise,
we think there might be replication of costs/overheads as Infosys creates layers
of management and specialization within the verticals. Complete verticalization
may not be the most cost-effective approach but it may be preferred if it helps
improve customer intimacy and responsiveness.
• The logic behind verticalization of infrastructure management, testing and
BPO, which we believe are more horizontal in nature, is unclear to us. By
verticalizing these service lines we think Infosys could miss out on the synergies
which could be achieved from the horizontal orientation of these service lines.
• Moreover, we think the fungibility across verticals will be restricted by
limited resource sharing across the four vertical groups. This does not
maximize resource management (or utilization). We reiterate that verticalization
and identification of seven themes might be a step in the right direction but
execution is key. We are keen to hear how Infosys will deal with any
organizational/structural challenges arising from this restructuring.
• Business innovation as a separate service line should help Infosys focus on
IP and strategic themes. Subhash Dhar, in his new role, plans to focus on
monetization of IP (intellectual property) along with building new IP. The
company has a sizable IP inventory and intends to develop alternate models of
monetization. However, currently Finacle is the only IP which Infosys has
effectively monetized. The articulation of goals around IP sounds good to us,
but we will look for measurable results.
• Retain Neutral rating on Infosys. Still prefer TCS, Wipro and HCLT (all
OW). We believe the current low premium of Infosys’ valuation vis-a-vis Wipro
of 8% (on our FY12E P/E valuations) might be seen as a tactical trade in favor
of Infosys by some investors.