Infosys Financial Results and its Future Contradictions

Last updated on: July 12, 2012 at 12:42 pm by Desh Kapoor

Infosys Financial Results and its Future Contradictions 2012-07-12T12:42:17-05:00 Desh Kapoor

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One is trying to understand Infosys and where it is going. Honestly, I cannot make out the logic behind some of what is happening in there. Read the following and contemplate:

Lost a major transmission client in Europe (portfolio worth $15 mn)
Pricing and Currency Fluctuations: Lost $13 mn on currency fluctuations (bad investment?). While its rooting for the Indian Rupee to stay at INR 55 / $, the fall in Rupee is being offset by lower pricing. So, clients are smart – they are factoring the fall in Rupee in their pricing.
Infosys is acknowledging that its Margins have declined due to Visa and Employee costs
The company is now looking for Inorganic growth
Client confidence is fairly low in the current market, which is why they are postponing their investment decisions.
Total number of people promoted in the company this year (July 1, 2012) now total 20,000 – or 13% of the entire company has been promoted. But these promotions have coming largely with salary freezes.

A few observations about Infosys’ situation going forward.

Margins and Foreign Policy: If your company’s Operating Margins are hostage to some foreign country’s Foreign policy, then your Corporate Strategy is all screwed up! You have NO control! This outsourcing business and the life of Infosys (and other Indian IT companies) has been there for over 2 decades now. It is time they had a change in strategy. If in 2012 their margins take a hit because of Visa cost in US, then they are a ship waiting to sink, sooner or later.

Pricing Fluctuations: If you are a Global company, you cannot rejoice at the falling Rupee and increasing Export revenues anymore. The correct measure is DOLLAR REVENUES for a company listed on US Exchanges – with an ADR – as Infosys is. I find it nauseating and immature of the analysts in India to play up the currency fluctuation for exports so much. It is nonsensical. More so, because they are betting against India and themselves! The lower the INR, the higher the inflation -> higher the employee and other operational costs. And you can see that happening in Infosys’ P&L as listed above.

Inorganic Growth: With fallen stock price and lower cash reserves, NOW, after so many years, Infosys wakes up to inorganic growth. And even now it is not talking of a large acquisition in consulting or services, which is a must for its long terms survival. The rates being charged to clients for Indian Developers have come down from $45 in 2009 to roughly $15-20 now. For any Account manager, the Nirvana in such a downward spiral for outsourcing cost is in “Blended Rate”, where the high end consulting with Onsite resources cover up. But how do you do more of that, if you are a minority compared to say an Accenture or IBM? The imperative for all these years should have been to buy a LARGE consulting firm, while the stock price and the cash reserves were high. With a largely outsourcing work, the margins will be hit even more in the coming days.

Reference Articles:

Key Takeaways from Infy results

Infosys promotes 20,000 people

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