Infosys CEOs aren't used to listening to sermons. Not from reporters and not from analysts. But that's exactly what happened, last fortnight, when Nimish Joshi, an analyst with brokerage firm CLSA addressed an open letter to Infosys CEO SD Shibulal questioning the direction in which the Bangalore-headquartered IT services company was headed.
The part homily, part Jerry Maguire-esque letter had D-Street analysts wagging chins about the merit and method of the well-articulated note. Everybody agreed on one thing, though: this was unusual. But then again, what was also unusual was that Infosys missed its quarterly guidance, one which it had lowered just three months before, after a long, long time.
Like Joshi succinctly put it, "For much of last decade, Infosys' guidance has been a line in the sand to gauge not just company growth but also sector-wide growth. Unfortunately, the divergence in actual performance and guidance over the last 18-24 months has meant that investor confidence in your guidance has gone down. The big miss in the latest quarter has only served to further that sentiment. I hope the recent miss was a blip after 47 straight quarters of meeting quarterly guidance."
These are unusual and uncertain times for Infosys and the Indian IT industry. The spate of quarterly results last week added to that air of uncertainty. While Infosys and Wipro fended off questions about their weak guidance,TCS celebrated its first ever $10 billion annual revenue with some positive commentary about the year ahead. (TCS doesn't give quarterly or annual guidance.)
That made analysts split hairs on whether Infosys and Wipro were facing "company-specific problems" or if the industry as a whole was in hot water. Either way, the general consensus was more or less on the lines of what Infosys founder NR Narayana Murthy had said more than a decade ago about the murky market environment prevailing then: "There's so much fog on the windscreen." A helluva lot of it.
The part homily, part Jerry Maguire-esque letter had D-Street analysts wagging chins about the merit and method of the well-articulated note. Everybody agreed on one thing, though: this was unusual. But then again, what was also unusual was that Infosys missed its quarterly guidance, one which it had lowered just three months before, after a long, long time.
Like Joshi succinctly put it, "For much of last decade, Infosys' guidance has been a line in the sand to gauge not just company growth but also sector-wide growth. Unfortunately, the divergence in actual performance and guidance over the last 18-24 months has meant that investor confidence in your guidance has gone down. The big miss in the latest quarter has only served to further that sentiment. I hope the recent miss was a blip after 47 straight quarters of meeting quarterly guidance."
These are unusual and uncertain times for Infosys and the Indian IT industry. The spate of quarterly results last week added to that air of uncertainty. While Infosys and Wipro fended off questions about their weak guidance,TCS celebrated its first ever $10 billion annual revenue with some positive commentary about the year ahead. (TCS doesn't give quarterly or annual guidance.)
That made analysts split hairs on whether Infosys and Wipro were facing "company-specific problems" or if the industry as a whole was in hot water. Either way, the general consensus was more or less on the lines of what Infosys founder NR Narayana Murthy had said more than a decade ago about the murky market environment prevailing then: "There's so much fog on the windscreen." A helluva lot of it.
Infy's Speed Bumps
So, what really went wrong? Wipro's IT services revenue growth was the lowest among its peers and its guidance for the first quarter of 2012-13 left analysts disappointed. Infosys on the other hand missed its quarterly guidance and shockingly put out a guidance of 8-10% for 2012-13, much lower than industry body Nasscom's growth projection for the industry at 11-14%. Optimists pointed out that Infosys has always guided below Nasscom's growth projections - even in the best of times. For instance, its 2005-06 projection was 28-30% while Nasscom projected a growth of 30-32%. In the end, the company grew by 36% that year, well above Nasscom's numbers. But then again, Infosys' post-results commentary did not give much-needed succour to heart-burnt analysts. "Nasscom has given a very wide range of guidance of 11-14% factoring the uncertainty of the environment. They have said that they will revisit the numbers somewhere in the middle of the year," Infosys CFO V Balakrishnan told analysts, pointing out that Infosys had arrived on its guidance based on ground realities of customer behaviour. "We don't want to get into a debate whether Nasscom is right or wrong but both [projections] will converge at some point of time. You will know who is right and who is wrong," he added. A long-time industry watcher believes the Nasscom numbers seem achievable. "Perhaps, Infosys' process-oriented, survey-driven forecasting isn't working in this volatile market when customers themselves don't know what's happening," he says. Hold That Decision But perhaps such criticism is harsh right now, as most Tier-I Indian IT services companies (which have announced results) have mentioned that decision making slowed down in the last month of the fourth quarter of 2011-12. Wipro CEO, IT business, TK Kurien had pointed out that deal closures were delayed in the last quarter of 2011-12, but were picking up in the first quarter of 2012-13. Even TCS had hinted the same. "The year [2012] started a bit like 2009 with budget delays as a result of which companies struggled to get visibility," says Moshe Katri, managing director of Cowen and Co, a financial services firm. Infosys' problems were compounded by the fact that it is among the few companies that gives out annual guidance. "We have visibility for 65% of our business for the year and 95% of our business for the current quarter," says Infosys' Balakrishnan. Infosys calls this uncertain environment "the new normal". It points to the financial services space to exemplify what's happening. "In the financial services space, what we are seeing is zero-based budget with month-to-month spending philosophy," says Shibulal. "Usually, when profits go up, technology spending goes up but that's not happening. That's because profits are going up not because of business performance but because of things like write-downs etc," he adds.
The New Normal
So, what does this new normal translate to? And how can Indian IT services deal with it? ET on Sunday spoke to a bunch of analysts to figure out how things have changed. Brian Robinson, research director for HfS Research, a global services advisory, says that competition and pressure on all service providers have increased due to three factors. One, pricing alone does not differentiate providers anymore. "Nearly all the global majors including IBM, Accenture, CapGemini, have established or are establishing their footprints in India," he says. Two, cost savings (and therefore labour artbitrage) is now just one of the many expectations that customers have from service providers. Finally, increasing competition not just from the likes ofIBM and Accenture but also from a new breed of ambitious service providers in Latin America (who are tapping the US and European markets) and the likes of Google, Amazon and Salesforce which are offering services like "software as a services" (SaaS) or "platform as a service" (PaaS, where hardware or storage can be rented over the internet). Competition is also being fuelled by the fact that deal sizes and tenures have shrunk. "Deal sizes are getting smaller. A few years ago, $100 million deals were in play. Now deals are more in the $25-50 million range. Moreover, even the smaller deals are being fought out by not just the Tier II companies but the large MNCs which have a presence in India," says Amneet Singh, India country head for global sourcing advisory firm, Everest Group. Deal tenures too are being crimped. "The tenure of outsourcing contracts is coming down. The contracts which were 8-10 years in tenure are now being renegotiated to 3-5-year-long contracts," says Sanjoy Sen, senior director, Deloitte, a consultancy. "Indian IT services companies can actively seek contract renegotiations with clients," he adds. Living With It So, how are Indian companies dealing with this new environment? Most Indian companies are pushing for non-linear growth (where revenue growth is not related to manpower addition proportionally) a lot more seriously. "Several have instituted non-linear growth models as a response, restricting their business models to stimulate innovation in their organisations," says HfS' Robinson. "We believe that the largest Indian providers [Infosys, Wipro, TCS...] have strong enough balance sheets to make this transformation. We are less confident that smaller providers will be able to make this transition," he adds.
Infosys is betting big on its platforms and products business. As Shibulal pointed out: "Our revenues from platforms was $25 million for the quarter but at the same time we exited the year with $350 million of booked business." TCS CEO N Chandrasekaran says that non-linear is among the biggest areas of focus for the company. "We really want to drive that very aggressively from this quarter... More than 10% of our incremental revenues definitely will be from nonlinear," says Chandrasekaran.
Wipro has been showcasing client wins in new areas like analytics and cloud. "The company's keen focus is to grow its new focus areas like Analytics (35 new accounts in the year), Cloud (40 new wins in this quarter) and Mobility (50 new customers added in FY13)," reads a recent report from brokerage house Prabhudas Lilladher. In a recent conference call with analysts, Kurien also mentioned that the company was investing in sales capabilities and had divided its sales teams into hunting (new client acquisition) and farming (mining existing customers) teams. Consequently, Wipro's sales and marketing expenses were the highest since the fourth quarter of 2003-04, adds the Prabhudas Lilladher report. Wooing Uncle Sam Deloitte's Sen believes that Indian companies which are able to offer a global delivery model as compared to an India-centric delivery proposition are likely to fare better than those who don't. Infosys plans to hire 1,200 people in the US this year. TCS and Wipro also have stated their intentions to hire in this market. Part of this could also be to assuage some of the shrill criticism that Indian companies get from American politicians on outsourcing related job losses around American presidential elections. So, what lies ahead in the next year for Indian IT? Is it just slower growth and uncertain times? One can't be sure. Most analysts ET on Sunday spoke to said they expected growth momentum to pick up later this year. However, it's not going to be anywhere close to the robust growth the industry witnessed before September 2008. Growth for the industry is mostly likely to be in its early teens, with a few exceptions. "We see Cognizant growing at 25-30% growth in the next 3-5 years," says Cowen's Katri. "Infosys is going through an internal transformation of sorts...it would be interesting to see what comes out of it," says Katri. Does he see Tier I companies slashing prices to retain business or market share? "I don't see substantial pricing cuts," says Katri. "Indian IT companies realised in 2002-03 that once you drop prices [which they did back then], it's very tough to get them back up again," he adds.
And then, there is the question of acquisitions, given the vast pile of money that Indian Tier-I companies are sitting on. "Cash is a good thing to have," says Balakrishnan. "We have spoken about Infosys 3.0 where we want one-third of our revenues to come from platform, product and solutions businesses which account for 6% of our revenues today. If we need to get to one-third in the medium term, we need to do acquisitions. We may use the cash for that," he adds. Maybe, it won't be that bad a year after all.
IT results: Mixed bag Wipro: Revenue growth for IT services was lowest among peers and its guidance for the first quarter of FY13 was disappointing. The company blamed it on patchy domestic market revenues, especially in the telecom and government verticals. Revenues (IT services): Rs 28,431 cr (2011-12); up 21% YoY TCS: Became the first Indian IT services company to cross the $10 billion revenue mark. The company gave out the boldest commentary among its peers: did not expect any pricing pressure, wasn't worried about client IT budgets in the coming year. Revenues: Rs 48,894 cr (2011-12); up 31% YoY Infosys: Infy missed its last quarter guidance for FY12, blaming it on unexpected slack decision-making and ramp-down by clients. The street was shocked by lower revenue guidance of 8-10% - much lower than Nasscom's projection of 11-14% growth in FY13. Revenues: Rs 33,734 cr (2011-12); up 15.8% YoY HCL Technologies: Recorded revenue growth driven by a rise in offshore volumes. Client addition was robust with 14 new deals worth $1.5 billion in the March quarter. HCL has 4 clients with over $100 million billing compared with just one a year ago. Revenues: Not available as HCL follows a July-June financial year |
No comments:
Post a Comment