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Infosys Technologies (INFO)
Technology
Notes from Infosys’ UK NDR. We hosted a series of meetings with investors in UK for
Infosys. The company expressed confidence on achieving FY2012E guidance and did
not see any impact of the recent developments on client’s decision-making. Simplified
organization structure and integration of service offerings are driving agility and greater
deal participation and wins. In the medium term, the company is making big
investments in consulting and business innovation to drive profitable growth. We retain
our BUY rating on the stock with end-FY2013E target price of Rs3,400.
Improvement in deal participation will drive strong growth in 2HFY12E
Infosys expressed confidence on achieving FY2012E revenue growth guidance which builds in a
strong 5.9% qoq growth in 3Q and 4Q of FY2012E. The company’s confidence on a relatively
stronger 3Q and 4Q is based on increase in deal participation and likely closure of large
transformation and outsourcing deals in 2Q. Elimination of internal distractions, renewed focus
and clear mandate on revenue growth are also driving the change. Note that the company has not
witnessed any change in decision-making of clients despite some external market shocks.
Infosys highlighted that the business momentum in 3Q and 4Q of FY2011 was derailed by a series
of events starting with (1) staffing challenges leading to loss of business, (2) the company not
demonstrating flexibility in certain strategic contracts and (3) internal distraction caused by
reorganization. Corrective action has been taken since.
Investing heavily in business transformation and innovation
Infosys re-emphasized its focus on ensuring a balance of revenues between business operations
(60% of revenues currently), transformation and innovation. Infosys has accelerated investments in
business transformation and already recruited over 1,500 consultants (PI and others) in North
America and intends to recruit 1,500 consultants in Europe. Infosys believes this would increase
addressable opportunity, stickiness of revenues and revenue productivity (which would enable it to
protect profitability). Do note that Infosys’ onsite cost per person has increased by
US$1,000/month over the past five quarters due to aggressive recruitment of consultants. The
downside of this strategy is it increases cyclicality in revenues and can hurt margins in the
investment phase. Infosys is focused on acquisitions to accelerate growth in business innovation.
No upside to pricing in near term, upside on margin guidance from higher utilization
Higher employee utilization than guidance (assumed flat from 1QFY12 levels) can provide upside
to FY2012E margin guidance of 26.9% (assumed 250 bps decline). However, pricing is unlikely to
be a lever for margin improvement in FY2012E. In fact, the company indicated that pricing may be
under pressure for commoditized service offerings.
Telecom vertical will continue to be a drag for the next two quarters
Infosys’ telecom vertical has been a material drag on growth and one of the major reasons
for underperformance on revenue growth vis-à-vis peers. Telecom vertical revenues are
unlikely to grow for the next two quarters as the company deals with the pain of rampdown
in select accounts.
Note that Infosys’ telecom portfolio is weighed towards the wireline segment in the
developed markets. Investments in networks by developed market telcos are lower than
emerging markets and even within that spends are concentrated in the wireless segment;
the wireline segment has stagnated and even declined. TCS and Wipro in contrast have a
well-balanced portfolio with revenues spread across wireline and wireless segments and
developed and emerging markets.
Infosys has won engagements in the wireless segment in Europe and US but the ramp-up
from these relationships will not offset potential decline of revenues from existing accounts
in the near term.
Clients demanding increase in credit period
DSO of Infosys increased to 76 days from 67 days two years ago. The company attributed
this to client demand for increase in credit period to 45-60 days from 30-45 days. The
company has agreed to these demands in select situations causing increase in receivables
collection cycle. However, DSO days are unlikely to deteriorate from the current levels.
Final leg of reorganization to be completed by August
Infosys believes that the new organization structure will provide agility, improve the speed of
decision making and simplify offerings. The company has completed the reorganization
without any material attrition at the senior management level. The final leg of
reorganization, i.e. embedding consulting into respective industry verticals, will be
completed in August 2011.
Update on changes in leadership and style
Infosys expects far more aggression on growth. A simplified organization structure, agility in
the marketplace, increase in periodicity of reviews, disproportionate efforts on high potential
accounts and timey intervention in case of slippages are essential building blocks in pursuit
of growth. As highlighted earlier in the note, Infosys is now flexible on engagement
structure and pricing to drive its share of revenues.
Infosys indicates that the addition of Basab Prashan to the leadership team will also help.
Basab will strengthen sales effectiveness, hire new sales talent, consolidate and improve
sales processes. Basab joined Infosys a month back.
Sanjay Purohit will handle the business innovation piece. Sanjay was earlier responsible for
long-term strategy planning, strategy execution, medium-term business planning, balanced
scorecard implementation and operations planning.
Initial feedback on new themes encouraging
Infosys has conducted co-creation workshops around the new theme on ‘Building
Tomorrow’s Enterprise’. These co-creation workshops are done with senior management
teams of the clients. The company shortlisted 50 clients and has done 16 workshops and
won a large engagement around this theme. Engagement in these workshops is done by the
top 25 people of Infosys led by Shibulal. The
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFO)
Technology
Notes from Infosys’ UK NDR. We hosted a series of meetings with investors in UK for
Infosys. The company expressed confidence on achieving FY2012E guidance and did
not see any impact of the recent developments on client’s decision-making. Simplified
organization structure and integration of service offerings are driving agility and greater
deal participation and wins. In the medium term, the company is making big
investments in consulting and business innovation to drive profitable growth. We retain
our BUY rating on the stock with end-FY2013E target price of Rs3,400.
Improvement in deal participation will drive strong growth in 2HFY12E
Infosys expressed confidence on achieving FY2012E revenue growth guidance which builds in a
strong 5.9% qoq growth in 3Q and 4Q of FY2012E. The company’s confidence on a relatively
stronger 3Q and 4Q is based on increase in deal participation and likely closure of large
transformation and outsourcing deals in 2Q. Elimination of internal distractions, renewed focus
and clear mandate on revenue growth are also driving the change. Note that the company has not
witnessed any change in decision-making of clients despite some external market shocks.
Infosys highlighted that the business momentum in 3Q and 4Q of FY2011 was derailed by a series
of events starting with (1) staffing challenges leading to loss of business, (2) the company not
demonstrating flexibility in certain strategic contracts and (3) internal distraction caused by
reorganization. Corrective action has been taken since.
Investing heavily in business transformation and innovation
Infosys re-emphasized its focus on ensuring a balance of revenues between business operations
(60% of revenues currently), transformation and innovation. Infosys has accelerated investments in
business transformation and already recruited over 1,500 consultants (PI and others) in North
America and intends to recruit 1,500 consultants in Europe. Infosys believes this would increase
addressable opportunity, stickiness of revenues and revenue productivity (which would enable it to
protect profitability). Do note that Infosys’ onsite cost per person has increased by
US$1,000/month over the past five quarters due to aggressive recruitment of consultants. The
downside of this strategy is it increases cyclicality in revenues and can hurt margins in the
investment phase. Infosys is focused on acquisitions to accelerate growth in business innovation.
No upside to pricing in near term, upside on margin guidance from higher utilization
Higher employee utilization than guidance (assumed flat from 1QFY12 levels) can provide upside
to FY2012E margin guidance of 26.9% (assumed 250 bps decline). However, pricing is unlikely to
be a lever for margin improvement in FY2012E. In fact, the company indicated that pricing may be
under pressure for commoditized service offerings.
Telecom vertical will continue to be a drag for the next two quarters
Infosys’ telecom vertical has been a material drag on growth and one of the major reasons
for underperformance on revenue growth vis-à-vis peers. Telecom vertical revenues are
unlikely to grow for the next two quarters as the company deals with the pain of rampdown
in select accounts.
Note that Infosys’ telecom portfolio is weighed towards the wireline segment in the
developed markets. Investments in networks by developed market telcos are lower than
emerging markets and even within that spends are concentrated in the wireless segment;
the wireline segment has stagnated and even declined. TCS and Wipro in contrast have a
well-balanced portfolio with revenues spread across wireline and wireless segments and
developed and emerging markets.
Infosys has won engagements in the wireless segment in Europe and US but the ramp-up
from these relationships will not offset potential decline of revenues from existing accounts
in the near term.
Clients demanding increase in credit period
DSO of Infosys increased to 76 days from 67 days two years ago. The company attributed
this to client demand for increase in credit period to 45-60 days from 30-45 days. The
company has agreed to these demands in select situations causing increase in receivables
collection cycle. However, DSO days are unlikely to deteriorate from the current levels.
Final leg of reorganization to be completed by August
Infosys believes that the new organization structure will provide agility, improve the speed of
decision making and simplify offerings. The company has completed the reorganization
without any material attrition at the senior management level. The final leg of
reorganization, i.e. embedding consulting into respective industry verticals, will be
completed in August 2011.
Update on changes in leadership and style
Infosys expects far more aggression on growth. A simplified organization structure, agility in
the marketplace, increase in periodicity of reviews, disproportionate efforts on high potential
accounts and timey intervention in case of slippages are essential building blocks in pursuit
of growth. As highlighted earlier in the note, Infosys is now flexible on engagement
structure and pricing to drive its share of revenues.
Infosys indicates that the addition of Basab Prashan to the leadership team will also help.
Basab will strengthen sales effectiveness, hire new sales talent, consolidate and improve
sales processes. Basab joined Infosys a month back.
Sanjay Purohit will handle the business innovation piece. Sanjay was earlier responsible for
long-term strategy planning, strategy execution, medium-term business planning, balanced
scorecard implementation and operations planning.
Initial feedback on new themes encouraging
Infosys has conducted co-creation workshops around the new theme on ‘Building
Tomorrow’s Enterprise’. These co-creation workshops are done with senior management
teams of the clients. The company shortlisted 50 clients and has done 16 workshops and
won a large engagement around this theme. Engagement in these workshops is done by the
top 25 people of Infosys led by Shibulal. The
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