INFOSYS - CALLS FOR INTROSPECTION

By Ruma Dubey

The YoY numbers for Infosys are good but it is the sequential numbers which are down. And though it has met its guidance for FY12 there are a few very pertinent questions which comes to mind when one todays looks at the numbers.

When the company announced its performance for Q1FY12, it gave the guidance for entire FY12 and then, it had said that revenues would be in the range of Rs.31,777 to Rs.32,311 crore and EPS would be in the range of Rs.128.30 to Rs.130.08. And what did it achieve? Revenue of Rs.33,743 crore and EPS is at Rs.145.55, both of which have far exceeded the given estimates at the beginning of the year. At that time, it had assumed the dollar conversion at Rs.44.50.

Now take the guidance given at the end of Q3FY12 for the entire fiscal. It had expected revenues in the range of Rs.34,273 crore to Rs.34,294 crore and EPS of Rs.147.13. Compared to that, there has been a drop in actual revenue and EPS for FY12. The question come to mind – compared to the Q3 guidance, Q1 guidance was muted; does that mean the management at the end of Q3 expected a much better year ending than what it did at the beginning of the fiscal? Or is this the trend we need to watch out for where the management always underplays the guidance for the forthcoming fiscal at the beginning of the year as it is too early to predict the entire year earnings? Then doesn’t that logically mean that like TCS, Infosys should also stop giving guidance?  But those on the Street are miffed with Infosys today because till Narayana Murthy was at the helm, it was always a case of exceeding the targets; at that time we used to wonder why Infosys was being so conservative. But now, we are seeing that the performance falls short of the guidance. So the question being asked is whether the management is not competent enough to make correct estimations today?

A look at the verticals now. Q4FY12 BFSI fell 4.6% on a QoQ , Manufacturing grew 2.2%, RCL (Retail and life sciences) fell 2.9%, ECS declined 0.3%. And the geographical’s shows that North America is down 4% (QoQ), Europe is up by 0.2% and RoW is up 5.2%.

Two inferences from this. Firstly, North America is actually showing signs of slowly but surely bouncing back while Europe, as stated by S. D. Shibulal, CEO and Managing Director during the Q3FY12 numbers, is undergoing a crisis. Yet, Europe actually showed a QoQ growth, albeit marginal. But surprisingly, while growth was expected from North America, from where Infosys derives over 60% of its earnings, fell and the fall is across all verticals, except manufacturing. So where is the problem really? While companies in USA, IT companies, are showing a growth in their Q1 and Q2 numbers, how come Infosys is not able to ride this wave of recovery? Is it because it is not giving the price which the market demands, sticking to higher margins or it is because, it is genuinely losing ground in USA?  

What we also feel is that Infosys is probably at the fourth stage of the product cycle – first being market introduction stage, second being growth stage, third being maturity stage and fourth being saturation and decline stage. In this fourth stage, typically, costs become counter-optimal, sales volume decline, prices, profitability diminishes, profit becomes more a challenge of production/distribution efficiency rather than increased sales.  Thus at this juncture, it needs to look at different markets, needs to increase focus on growth markets which are more lucrative. Maybe it needs to lay emphasis on BRIC – Brazil, Russia, India and Russia.

And that is why today a lot of fingers are pointed at the leadership at Infosys. If the leaders there could not anticipate these changes and did not move as quickly as they should have, what leadership are we really talking about today at Infosys?  If the same performance is repeated in Q1FY13 also, the murmur questioning the leadership could become a din. One cannot always blame it on the external circumstances – a company needs to emerge winner, irrespective of these circumstances, maybe an aberration or two can be excused but when this aberration becomes a routine, surely then the leadership needs to know that there is a problem within.

For details on the performance kindly click on the following link: http://www.infosys.com/investors/reports-filings/quarterly-results/2011-2012/Q4/Documents/IFRS-INR-press-release.pdf