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Infosys: Its secret potion
Mar 26, 2007

This article was originally written in August 2004. The original draft, in its entirety, has been retained here while necessary updations have been made to the same in terms of adding two more years of analysis The most important and authentic source of information about a company’s financial performance is its annual report. But, these reports serve many other important purposes as well, apart from just elucidating on the finances. One such purpose is to indicate to investors what is the macro environment in which the company is operating in a particular year. More often than not, a few statements or paragraphs speak out the entire story.

However, if one were to go through the last six annual reports of the software major, Infosys, there is a quotable quote every year – one that indicates the theme of the annual report and the overall environment that the company is performing in. Let us understand the import of the quotes that appeared in Infosys’ last six annual reports, starting from FY01.

Annual Report 2000-01: The future depends on what we do in the present. – Mahatma Gandhi
(Sales – US$ 414 m, PAT – US$ 137 m)
(Sales growth-115%; Profits growth-120%; OPM-40.2%)

This annual report was released in the aftermath of the dotcom bust. The central idea as represented by the above thought, rightly captures the spirit of that time for Indian software companies. What this quote indicates is the Infosys has to improve upon its present (2000-01 at that time) for if it does so, what comes later would be better. The quote rightly captures that the company would have to take initiatives that would help it to come out of the slowdown and help it move towards higher and sustainable growth in the future (post 2000-01).

Annual Report 2001-02: Adversity has the effect of eliciting talents, which in prosperous circumstances would have lain dormant. – Horace
(Sales – US$ 545 m, PAT – US$ 169 m)
(Sales growth-37%; Profits growth-29%; OPM-39.9%)

This quote signifies the changes going through Infosys during the period concerned that were to help the company in facing adverse times, as global technology spending was on a downturn. The company was rapidly evolving its global delivery model, building up physical infrastructure to accommodate its large manpower base in the future and trying to derisk its revenues from a single large geography and some particular domains. In short, Infosys was trying to build up a base from where it can launch for a higher and sustainable growth in the future. While the company is still in the process of building up the much important base, 2001-02 can be said to be the year when the company began aggressively in its pursuits towards higher growth.

Annual Report 2002-03: I must govern the clock, not be governed by it. – Golda Meir
(Sales – US$ 754 m, PAT – US$ 197 m)
(Sales growth-40%; Profits growth-18%; OPM-34.9%)

This quote emphasizes the core advantage that India in general and Infosys in particular have with regards to the fast growing IT outsourcing space. It indicates the importance of time difference that India enjoys over the US, the largest market for Indian software services. Being a pioneer of the global delivery model (GDM) whose basis lies in providing seamless round-the-clock services across all geographies, Infosys has gained global recognition in its abilities on the project execution and project delivery fronts. Fascinated by this aspect (and others like cost arbitrage) of the GDM, the global technology majors are trying to replicate the Indian offshoring model.

Annual Report 2003-04: One cannot manage change. One can only be ahead of it. – Peter Drucker
(Sales – US$ 1,063 m, PAT – US$ 272 m)
(Sales growth-33%; Profits growth-30%; OPM-32.9%)

Now, this thought represents how Indian software companies like Infosys are trying to fight off the challenges posed and changes brought about by the global technology majors replicating the Indian outsourcing model. The Indian companies are doing this through a counter-attack in the form of penetrating the high-end domains of these global MNCs. Infosys, for instance, is continuously increasing revenue contribution from high-end services like IT consulting, systems integration and package implementation. And it has to continuously do so, for its growth to attain higher speed and sustainability. Moving up the value chain would also ensure closer and long-term ties with clients.

Annual Report 2004-05: The creation of a thousand forests is in one acorn. – Ralph Waldo Emerson
(Sales – US$ 1,591 m, PAT – US$ 422 m)
(Sales growth-47%; Profits growth-52%; OPM-32.8%)

This quote emphasises that Infosys is thinking big and is ready to scale up fast. For an IT company scaling up is non-negotiable and is vital for its longevity and prosperity. Infosys’ success over the years lies in their business model, leadership, values and aspirations. The company’s business model, leadership and values have been talked about the most but the important thing is the change in their aspirations over the years. Setting a goal far from its reach is the main driver of passion within and there are no substitutes for dreaming big. The time has come for the company to scale up fast on the value chain and take on the challenge posed by the global technology majors.

Annual Report 2005-06: Make no little plans; they have no magic to stir men’s blood. – Daniel Hudson Burnham
(Sales – US$ 2,153 m, PAT – US$ 556 m)
(Sales growth-34%; Profits growth-30%; OPM-32.5%)

This quote signifies that Infosys after completing 25 years is no longer a ‘novice’ and has matured as an ‘expert’ in its sphere of operations. Prior to this, its success was many a times exaggerated and its failures were taken lightly. But from hereon, each and every decision it makes will be under tight scrutiny. It signals the arrival of a strong, confident and ‘young’ company, which is ready to take on bigger challenges. As Napoleon Bonaparte rightly said,” impossible is a word which is not found in my dictionary”. The time has come for the company to look on to higher aspirations, and learn to accept failures with calmness. Infosys will need much more than this to achieve bigger and more ambitious targets. It has been a long journey for Infosys since 1981 but the company still has a long way to go to match the standards set up by global incumbents like IBM or Accenture.

What in store?

Over the past decade, Infosys has performed brilliantly on almost all quantitative and qualitative factors like revenue growth and profitability, management competency, project delivery and execution and managing scale. The company has indeed outperformed the industry in all these aspects. However, the company’s growth momentum seems to have gathered some speed only post 2000, the year when excessive euphoria and worthless investments had left the global technology industry in a state of turmoil.

Now, as Infosys tries to consolidate its position as the domestic market leader, builds up scale and competitive advantages, and continuously moves up the value chain, the annual report for FY07, to be released a few months later, might very well capture an idea that could be something like this – "You’ve got to get to the stage in life where going for it is more important than winning or losing." Arthur Ashe.

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