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Infosys: Research Meet Extracts - Views on News from Equitymaster
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Infosys: Research Meet Extracts
Sep 7, 2011

We recently attended an analyst meet organized by Infosys Ltd , India's second largest software company, so as to get a clear understanding of the strategies that are likely to be implemented by the management for the next phase of the growth. As is well known, the company went through a major leadership change recently. The whole business was restructured into four industry verticals and three service lines. Therefore, we wanted to understand the transformed vision of the company and how the management is going to execute the same.

Here are the key takeaways: -

Optimistic on demand environment but clients are cautious: With regards to rising volatilities in global economic environment due to debt crisis in the US and some part of the European regions, the management stated that whatever happening right now is temporary. The software industry will continue to grow on account of more Information Technology (IT) investments by businesses and consumer-related activities using technologies.

The management stated that nothing has changed from the client side. There are no budget cuts. None of the clients have cancelled deals. At the same time, they stated clients have become very cautious. But clients are not taking any extreme steps. As of now, clients are doing a lot of diligence before awarding deals. Due to uncertainties, decision making is getting delayed. The management also added that it would be too early to comment on the effects of rising uncertainties in the US and European markets.

Premium pricing intact: The management stated that the company still commands a premium pricing in the market due to values and differentiation in its services, abilities to handle large transformational projects, to execute complex tasks and to provide end-to-end solutions. They stated that the learning from 2008 meltdown would be helpful in facing the current challenging situation. The company would continue with the predictable, sustained, profitable and de-risked growth model. At the same time, focus would remain on the industry leading financial performances.

Global Delivery Model (GDM) is not a differentiation anymore: GDM has clearly been the company's strength. But now, most of the Indian and global companies can provide the same. Therefore, the company is looking at global shared services platforms which would lead to transaction-based pricing, pricing based on outcomes. The management does not see much value in doing things in the same manner. This is because continuing with the same will only lead to commoditization of services. Therefore, the company is now looking at emerging themes like cloud computing. This would change the whole business model. It would shift the costs from capital expenditure (Capex) to operational expenditure (Opex). The company which can provide these emerging services would be able to differentiate itself from its peers.

Infosys 3.0: The Company has completed 30 years of its journey. Several times, the company faced downturns such as in 2003, 2008, but survived well. Now the company is looking at the next phase of the journey, the next 30 years. In the first phase of the journey, Infosys 1.0, the company created GDM which became the de-facto standard in the industry later on. During Infosys 2.0, the company developed the capabilities of providing end-to-end solutions and consulting services.

At present, the three service lines of consulting and system integration, business IT services and products and platforms and solutions contribute around 31%, 61% and 8.5% respectively to the total revenues. Now, the company aims to draw one third of its revenues from each of these service lines. In the past, the company has taken conscious decision to focus on consulting and system integration. As a result, in the last four years, its contribution rose from 23% to 31%. Now the company is also focusing on products and platforms business to increase the non-linear business.

Outlook on industry verticals: Clients are very cautious in the Banking, Financial Services and Insurance space due to regulatory changes. They are awarding short term projects as they are still not clear about the situation. In telecom space, Infosys would shift focus from wireline to wireless business. The company has won some good deals in this vertical. The company has won several transformational deals in energy and utilities space. It is focusing on upstream and mid-stream oil business. In retail, logistics and life science business, there is a slowdown on the capex side. On the opex side, there is pressure on the pricing.

Guidance, hiring and utilization: Despite the rising volatilities in the demand environment, the management has kept its revenue guidance of 18-20% growth in dollar terms intact. The management stated that they would not push out joining dates of new recruits and continue with their hiring plans. At present, the company's employee utilization level is in the range of 74-75%. The management stated that the company is comfortable with 78-82% levels.

What to expect?

The management of the company is cautiously optimistic on the demand environment. In recent times, the company has won several large transformational deals. The company is continuing with strengthening its consulting services which would not only help win new clients but also help in retaining existing ones. The company is also focusing on non-linear business. The management stated that Indian market is also very important for the company's growth. It would play an important role in achieving 1/3rd of the total revenues from the products and platforms business.

Though there are short term concerns, looking at the future growth prospects of the sector and the company's ability to make the most of these opportunities, we maintain our positive view on the company.

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