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What if Infosys stepped up on its selling expenses? - Views on News from Equitymaster
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  • Jun 27, 2013

    What if Infosys stepped up on its selling expenses?

    A lot has been said about the relative underperformance of Infosys vis-a-vis its closest peer, Tata Consultancy Services (TCS) in the last two years. There are two major reasons cited for Infosys' underperformance vs. TCS. The first is its change in strategy i.e. unveiling of Infosys 3.0, whereby the company intends to focus more on consulting, system integration and other value added services. The second is related to the changes in the company's top management.

    While both these reasons have been proven as a cause of worry, we tried to dig deeper to see if there was any other reason that could justify the underperformance. To this effect we undertook a hypothetical study to find out if there has been any correlation between the company's revenue growth and its investment in selling and marketing expenses. To draw a proper conclusion, we have taken TCS as the reference company against which we compared the data.

    The data points are tabulated as under:

    Table1: Comparative analysis of selling expenses
      FY08 FY09 FY10 FY11 FY12 FY13
    Revenue (INR m) 166920 216930 227420 275010 337340 403520
    YoY growth in revenue   30% 5% 21% 23% 20%
    Sales & Marketing (S&M) Expenses as a % of revenue 5.5% 5.1% 5.2% 5.5% 5.2% 5.0%
    YoY growth in S&M Expenses (% of revenue) -0.4% 0.1% 0.3% -0.3% -0.2%
    Revenue (INR m) 226201 278177 300254 373322 489084 629937
    YoY growth in revenue   23% 8% 24% 31% 29%
    Selling, General & Admin (S,G&A) Expenses as a % of revenue 21.6% 20.7% 19.7% 17.1% 18.2% 19.1%
    YoY growth in S,G&A Expenses (% of revenue)   -0.8% -1.1% -2.5% 1.1% 0.9%
    Source: Company data, Equitymaster research.
    Note: TCS does not report selling & marketing expenses separately

    We observe that Infosys has maintained its selling and marketing expenses between 5 and 5.5 percent over the last six years. TCS, on the other hand has also maintained its selling, general and administrative (S,G&A) expenses at an average of 19.4% over the last six years. Comparing the revenue growth figures vs. the growth in selling related expenses as shown in the above table, we cannot find any meaningful correlation. This brings us back to our original question. Is there something that TCS is doing that Infosys is not? And if so, what is it?

    In order to answer this question we shifted our focus on another key parameter - percentage of repeat business.

    The relevant data for Infosys and TCS are reflected in the table below:

    Table 2: Comparative analysis of percentage of repeat business
      FY08 FY09 FY10 FY11 FY12 FY13
    Percentage of repeat business 97% 97.6% 97.3% 98% 97.8% 97.8%
    Percentage of repeat business 96.4% 97.1% 97.5% 97.8% 98.4% 98.6%

    Here we see a different trend. The percentage of repeat business has been steadily growing for TCS. However, for Infosys the same percentage has remained stagnant in the past 2 years.

    To conclude

    We can conclude that repeat business is a major driver of growth for both Infosys as well as TCS. In order to achieve superior revenue growth it is imperative that the deliverables of these companies are of a very high standard, which in turn help them to mine their existing clients effectively.

    Although it is a fact that Infosys is trying to move up the value chain by offering higher value services, the strategy has not taken shape as of now. On quality front we feel that both companies deliver equitable results. There has been no report in the public domain, which indicates otherwise.

    Therefore the stagnation in repeat business could not be on account of quality. This leads us to wonder if the recent spate of management troubles could be the reason behind customers losing faith in the company. Have the clients of Infosys become wary because of the management changes and a shift in focus from traditional IT services to more high-end offerings? We do not have a definite answer, but we believe that is something worth pondering!



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    5 Responses to "What if Infosys stepped up on its selling expenses?"


    Jul 10, 2013

    I think it is dangerous to analyse on the above lines.it is based only one parameter and shows only a partial view of a situation. Pls come back with a full fledged an
    Analysis. I have to agree with 2 others who expressed their opinion


    Girish Chhabra

    Jul 10, 2013

    In my humble opinion, SG&A spend is directed more towards acquiring new customers. Extent of repeat business is a reflection of company being able to extend their services in existing accounts with limited sales and marketing effort/costs. I think it makes no sense to compare SG&A trends with trends in repeat business. As it is, for most tier 1 companies, repeat business always been in high nineties with minor fluctuations here and there.



    Jul 9, 2013

    Dear Sir, Thank you for writing to us. We are overwhelmed with your observation and sincerely appreciate your thoughts and rigorous analysis. Based on standard accounting practices, we considered ‘selling and marketing expense’ as a part of ‘operating cost’ and if you could kindly refer to Page 27 of the IFRS Consolidated Financials of Infosys (http://www.infosys.com/investors/reports-filings/quarterly-results/2012-2013/q4/Documents/Consol-FY13-Q4-Finstatement.pdf), you would get the break-up with respect to ‘selling and marketing’ expense. We made a very modest attempt in calculating the percentage of ‘selling and marketing’ expense with respect to the consolidated revenue, which again would be available on Page 2 of the same document, if we might humbly point that out. Taking those figures, we arrived at the percentages of 5.2% and 5% for FY12 and FY13 respectively. Similar calculations were made for earlier years as well. We would like to assure you that we do not believe in publishing random stuff and it is not our intent to mislead our readers in anyway. We would look forward to your support and would like to reassure you with our best of services, always! Regards, Team Equitymaster



    Jul 8, 2013

    This data set is complete hog-wash. Employee cost % of Revenue is about 50% and other operating costs is about 20%. This leaves an EBITDA % of about 28-30%. The actual marketing exp is very small in the range of 2-3%.
    Pls don't publish random stuff. You are misleading readers.



    Jul 6, 2013

    In fact, the observation that you have drawn from the data is exactly the opposite of what it appears. Infosys with just 5.5% of sales expenses is managing a repeat business of 97.8%. TCS with 19.1% - which is 300% more than Infosys in % terms is managing a higher client retention ratio of just 98.6% which is 0.8% more!!!. Data points to huge inefficiencies in the TCS sales force.

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