What if Infosys stepped up on its selling expenses? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  
  • Home
  • Outlook Arena
  • Jun 27, 2013 - What if Infosys stepped up on its selling expenses?

What if Infosys stepped up on its selling expenses?

Jun 27, 2013

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
Infosys
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%
TCS
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
Infosys
Percentage of repeat business 97% 97.6% 97.3% 98% 97.8% 97.8%
TCS
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!

Equitymaster requests your view! Post a comment on "What if Infosys stepped up on its selling expenses?". Click here!

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

Kiran

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

Like 

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.

Like 

Equitymaster

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

Like 

Phaneesh

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.

Like 

MANEESH

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.

Like (1)
  
Equitymaster requests your view! Post a comment on "What if Infosys stepped up on its selling expenses?". Click here!

More Views on News

INFOSYS Announces Quarterly Results (3QFY21); Net Profit Up 16.8% (Quarterly Result Update)

Jan 14, 2021 | Updated on Jan 14, 2021

For the quarter ended December 2020, INFOSYS has posted a net profit of Rs 52 bn (up 16.8% YoY). Sales on the other hand came in at Rs 259 bn (up 12.3% YoY). Read on for a complete analysis of INFOSYS's quarterly results.

INFOSYS Announces Quarterly Results (2QFY21); Net Profit Up 20.3% (Quarterly Result Update)

Oct 15, 2020 | Updated on Oct 15, 2020

For the quarter ended September 2020, INFOSYS has posted a net profit of Rs 49 bn (up 20.3% YoY). Sales on the other hand came in at Rs 246 bn (up 8.6% YoY). Read on for a complete analysis of INFOSYS's quarterly results.

INFOSYS 2019-20 Annual Report Analysis (Annual Result Update)

Aug 5, 2020 | Updated on Aug 5, 2020

Here's an analysis of the annual report of INFOSYS for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of INFOSYS. Also includes updates on the valuation of INFOSYS.

INFOSYS 2018-19 Annual Report Analysis (Annual Result Update)

May 21, 2019 | Updated on May 21, 2019

Here's an analysis of the annual report of INFOSYS for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of INFOSYS. Also includes updates on the valuation of INFOSYS.

More Views on News

Most Popular

What is EBITDA & EPS?

Here's a breakdown of what EBITDA margin means and why it is important as a valuation metric for investors.

Time to Book Profits in Pharma Stocks (Fast Profits Daily)

Jan 15, 2021

In this video, I'll show you why it might be the right time to take money of the table in pharma stocks.

Smallcap Stocks: Your Best Bet for 2021 and Beyond (Profit Hunter)

Jan 15, 2021

The pandemic failed to thwart Richa's investing success formula for 2020.

One Chart to See Before You Sell (Fast Profits Daily)

Jan 22, 2021

In this video, I'll show you a crucial chart that you need to check before you decide to sell any stock or index.

Invest in the Multibaggers of 2021 and Beyond (Profit Hunter)

Jan 21, 2021

Our ace stock picker is ready to capitalise on a big growth opportunity.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

INFOSYS SHARE PRICE


Jan 25, 2021 (Close)

TRACK INFOSYS

  • Track your investment in INFOSYS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

INFOSYS - CHINASOFT COMPARISON

COMPARE INFOSYS WITH

MARKET STATS