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New directions
For much of the last decade, Infosys has been a trendsetter in the Indian
IT industry. Be it reporting detailed operating metrics in the late 90s or
providing guidance or industry alignment of the business. Whatever
Infosys did became the gold standard for the industry. However, as
Infosys embarks on its largest and boldest transformation journey yet,
investor confidence is on hold, with recent financial underperformance
c.f. peers weighing on their minds. While even we are concerned about
the protracted nature of the current re-structuring, clarity of its objectives
and solid history of Infosys’ execution does extract some benefit of doubt.
However, in the near term financial metrics could continue to trail peers
limiting stock performance. TCS remains our top pick in the sector.
Significant changes in the organisation structure
We believe that the newly announced re-organisation at Infosys is a response
to the market environment that is demanding a greater share in large
transformational deals, better resource management, a clear visibility of
business competency and more non-linear revenue streams. The restructuring
into four industry verticals and three competency groups (Fig 1)
aims to make Infosys leaner and indicates a willingness to address
organisational gaps. Focus on emerging geographies like Continental Europe,
Japan and India has been retained with dedicated business units. While scale
of change is big, Infosys does not expect any restructuring charges from this.
Infosys’ prudence is understandable but not desirable
Unlike earlier re-organisations which were much smoother and quicker affairs,
the current one has lingered on for almost two quarters now. This has been a
distraction for employees and arguably impacted financial performance. In
our view, tough decisions need to be taken under the current circumstances
and earlier the better. A deeper dive throws up the likely reasons behind
Infosys management’s excessive caution in pushing through the changes.
While the large scale of change is a factor (but Wipro has just completed a
similar exercise in two months), Infosys’ circumspection likely stems from the
fact that the new appointees will be leading the company in the future as the
founders move away (which was not the case in earlier re-orgs).
Internal changes overwhelm favourable demand trends for now
Overall, we expect changing times for a company that has set standards of
organic growth with industry-high margins, but whose magical operational
excellence seems to be tapering a bit off late. The new org structure will take
some time to settle down before the intended objectives come through. Till
then, financial performance could remain muted c.f. peers. This drives us to
warn that Infosys may be a dull stock for a while – a pause lies ahead.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
New directions
For much of the last decade, Infosys has been a trendsetter in the Indian
IT industry. Be it reporting detailed operating metrics in the late 90s or
providing guidance or industry alignment of the business. Whatever
Infosys did became the gold standard for the industry. However, as
Infosys embarks on its largest and boldest transformation journey yet,
investor confidence is on hold, with recent financial underperformance
c.f. peers weighing on their minds. While even we are concerned about
the protracted nature of the current re-structuring, clarity of its objectives
and solid history of Infosys’ execution does extract some benefit of doubt.
However, in the near term financial metrics could continue to trail peers
limiting stock performance. TCS remains our top pick in the sector.
Significant changes in the organisation structure
We believe that the newly announced re-organisation at Infosys is a response
to the market environment that is demanding a greater share in large
transformational deals, better resource management, a clear visibility of
business competency and more non-linear revenue streams. The restructuring
into four industry verticals and three competency groups (Fig 1)
aims to make Infosys leaner and indicates a willingness to address
organisational gaps. Focus on emerging geographies like Continental Europe,
Japan and India has been retained with dedicated business units. While scale
of change is big, Infosys does not expect any restructuring charges from this.
Infosys’ prudence is understandable but not desirable
Unlike earlier re-organisations which were much smoother and quicker affairs,
the current one has lingered on for almost two quarters now. This has been a
distraction for employees and arguably impacted financial performance. In
our view, tough decisions need to be taken under the current circumstances
and earlier the better. A deeper dive throws up the likely reasons behind
Infosys management’s excessive caution in pushing through the changes.
While the large scale of change is a factor (but Wipro has just completed a
similar exercise in two months), Infosys’ circumspection likely stems from the
fact that the new appointees will be leading the company in the future as the
founders move away (which was not the case in earlier re-orgs).
Internal changes overwhelm favourable demand trends for now
Overall, we expect changing times for a company that has set standards of
organic growth with industry-high margins, but whose magical operational
excellence seems to be tapering a bit off late. The new org structure will take
some time to settle down before the intended objectives come through. Till
then, financial performance could remain muted c.f. peers. This drives us to
warn that Infosys may be a dull stock for a while – a pause lies ahead.
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