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Tough times ahead for Infosys in 2012?

Once regarded as the industry leader, Infosys is facing trouble times which the company has not seen since its birth, nearly three decades ago. In seven out of the past 12 quarters, Infosys' sequential sales and operating profit growth have lagged its rivals including Tata Consultancy Services and HCL Technologies. 


Infosys is on one side, busy in reshuffling its top management, the tech giant Cognizant is pecking significant orders in Indian IT. To the reader’s surprise, exactly three years ago, when the global slowdown had just started, Infosys was at some $500 million ahead of Cognizant. But now, that gap has shrunk to around $186 million, dangerously close to further narrow down the gap in next few quarters. Analysts are expecting that Cognizant will take over Infosys by year end.


Now, a question arises here, what is making one of India's most revered companies look ordinary. Let’s check out some responsible factor: 


Missing targets 


In Q3, Infosys missed analysts' estimate, the third time in four quarters. Revenue for Infosys was expected to be Rs 7,760 crore while actual outcome came in at Rs 7,250 crore. Also, net profit was estimated to be Rs 1,930 crore as against an actual achievement of Rs 1,818 crore. 


For fiscal year 2012, revenues expected to grow up by 15 to 17 percent.


High attrition rate


Increasing competition with its rivals including TCS, wipro and HCL, other companies are also increasing churn rate. Attrition in third quarter was 17 percent compared with 13.4 percent a year ago. That's the biggest rate of departures since at least 1998. 


Interestingly, the company hired 11,067 employees in the third quarter this fiscal, nearly 5,756 exited the organization during the same period, taking the net addition to 5,311. 


Technology Spending


The most immediate problem with the company is that its main clients are worse off than its competitor's. For instance, the biggest Infosys’ customers Bank of America and UBS are spending less on technology. On the other hand, financial firms like Citigroup and JP Morgan that work with Infosys' rivals, are not crimping on technology spending. 


Infosys as such is no exception to this in that it has added 120 clients in the first nine months of FY12 compared to 105 in the same period last year.


Fall in business profitability


Analysts say, lower profit growth is not the only fret for Infosys. The company has also begun to take a hit into what has long been considered as its strength - the high profitability of its business model. A recent report has indicated that its operating margin has gradually crept down to 29 percent in the recent quarter, the lowest in the past 15 quarters. 


Seems, Infosys’s high margin focus in the past has taken toll on its investment decisions. In comparison, Infosys’s arch rival TCS had operated at much lower margin of  22 percent, a few quarters ago. At that time, TCS was in the investment mode to strengthen its domain expertise and expand its presence across the globe. This approach helped TCS to capture a big portion of the outsourcing business. 


Dip in key verticals’ growth 


It is found, key verticals including banking, financial services and insurance (BFSI) and telecom saw sequential decline in growth to the extent of 0.3% and 4% respectively. 


It is worth noticing, BFSI and telecom are Infosys’s significant growth verticals. 


Seems, tough competition by its rivals including HCL and TCS has made Infosys uncomfortable and insecure. Let’s hope, Infosys will soon revive its lost repute. 


  


Satinder /ITVoir NewsDesk