What will it prove if NRN succeeds in his second stint with Infosys

Majority of the Infosys employees have breathed a sigh of relief at the news. While the actual outcome of this move is to be seen in times to come; it has brightened the moods like the pre monsoon showers in Bangalore. We live in an era of instant gratification. Eggs are counted before they are hatched. It is not very difficult to imagine that Infosys stocks will reach highs in coming week (unless and until counter balancing news of some US federal rulings about visa usage irregularity by India based Software service providers hit the news headline).

NRN’s return to Infosys draws comparison with some other famous comebacks like that of Steve Jobs to Apple or Pele’s return to Brazil’s national squad for 1970 world cup though he had announced retirement post 1966 world cup. The 7.5 Billion Dollar question is; “Will he be equally successful at that?”

There are critics and skeptics within and without the organization. I have heard the arguments that success of Infosys can also be attributed a large extent to the timing rather than the pure brilliance and talent of founders. TCS, Infosys, Wipro, Satyam, HCL, Mahindra BT; almost every India based IT companies grew handsomely in the first 25 years of their existence (1980 – 2005 era). Government showered the IT industry with ample tax holidays, there was no backlash in US, Europe for outsourcing jobs; recession was yet to hit West in the way it has been hitting in the recent times.  There was untapped market and Indian companies reaped the first arriver’s award. The test of the true mettle is going to be the next 25 years (2006 – 2030). What attributes have got the Indian companies to this status in last 25 years doesn’t guarantee the same trajectory in next 25 years. Everyone needs to reinvent, adapt and innovate to avoid dinosaurs’ fate.

Irrespective of the changed industry dynamics; NRN as an individual, commands respect. He is and will remain one of most admired entrepreneurs in India. He has led by example when it comes to imbibing the values of sharing credit, sharing fortune, not letting success get into the head, non-attachment to position of power, building successors, leading a controversy free life and what could be loosely termed as compassionate capitalism. He put his integrity and transparency above everything else. Some values that have really defined the character of the company, Infosys. One can only admire the decisions of Infosys like not bidding for any work for National UID scheme launched by Government of India when Nandan was chosen to lead the project; or not to make any attempt to gobble any of the assignments being executed by Satyam when it went bust.

It pains me to see that a man has been forced out of his well-earned retirement as the successors faltered. He is 67 years old now and has taken up the role for next 5 years! Perhaps it is not a burden for him as I see it. After all Infosys has been his middle baby. I wish him good luck as I wait and watch out for his magic touching my life one more time. J

Throw your stone at Phaneesh Murthy

Phaneesh Murthy has a knack for 2 things; he makes his employer and his secretary rich. The man who joins Infosys at the age of 27 years and in next 10 years plays a key role in taking its worth from $2 Million to $750 million; falters. For the same reason that Adam was thrown out of heaven; Phaneesh is shown the doors of Infosys. Somebody walks away with $3 Million in out of court settlement.

                Next 10 years, the man works in sheath to grow another company to 4 times its original size at the time of his joining. In the process, buying Patni Computers, the organization where the 4 founders of Infosys started their careers. Probably a symbolic defiance to his mentors and previous employers.
When everything was looking like a second dream run; the man does it again. He is named and shamed and fired again. Same weakness gets him down on two occasions. Will he rise one more time?

At least one man is wishing him good luck and success. The lawyer who filed the law suit against him twice.

Comparison of Infosys and TCS in light of Q2FY13 results

Infosys and TCS have announced their Q2 results for FY13 and it is a good time to compare the two and see where Infosys stands in comparison to TCS. This quarter has been important for Infosys, who in recent times has lost some of its reputation as being the industry bell-weather. Last few quarters have been in tough for Infosys and the peers have performed much better. TCS on the other hand has only consolidated its position as undisputed market leader.
In the analysis of the data below; we will try to see the signs of recovery and possibilities for Infosys.

INFY Vs TCS (comparison of size)

Parameters	INFY	TCS
Q2F13 Revenue (Million US$)	1797	2852.6
Quarter on Quarter Growth (%)	2.6	4.6
Operating Profit Margin (%)	26.3	26.7
Net staff	153761	254076
Attrition Rate (%)	15	11.4
Net staff addition in Q2F13	2610	10531
% Utilization	67.5	72.8
Revenue per staff per month in US$	3895.656	3742.44

TCS has done a sterling performance when in comes to quarter on quarter growth and curbing the attrition rate (amongst the lowest in the industry). What is remarkable is that it has overtaken Infosys on Operating margin as well!
The takeaway for Infosys here is that it has shown flexibility to reduce its margin. The revenue per staff for Infosys is higher than that of TCS though it has a lower utilization figure (67.5%). In fact if Infosys was able to increase the utilization to TCS level (72.8%); additional 43.5 MUS$ could have been generated in the quarter (theoretical). This could have pushed the QoQ growth to 5.5 from current 2.6.

Revenue from Verticals

Some of the observations are:

1.       Banking and Finance contribute the most for TCS while MFG contributes the least.

2.       In Infosys, the spread is more even with ECS being the smallest of all the verticals.

Note** For simplification; I have consolidated the verticals in TCS to match Infosys nomenclature

·         ECS = Telecom, Energy & utility and media & entertainment

·         RCL = Retail & Distribution, Hi Tech, Life Sciences & Healthcare, Travel & Hospitality and others

·         MFG = Manufacturing

·         Finance = Banking, Financial Services, Insurance

Geographic Breakup of revenue

Infosys has a much bigger exposure to North America and smaller exposure to Europe and India compared to TCS. This can be seen as a risk. Incidentally Infosys has just announced that it has completed the ground work for Infosys 3.0 strategy. As part of that strategy; Infosys has a vision to have a spread of revenues coming 40% from North America (and Canada); 40% from Europe (and UK) and 20% from rest of the world. Infosys also aspires to get even revenue; i.e.; 1/3 revenue from Transformation; 1/3 revenue from Optimization and 1/3 revenue from Innovation. (Interestingly that will not be by reducing the current revenues from high contributing area but by increasing the revenues from low contributing area. Talk of human ambitions!) New focus area like Sustainability, Engineering, Cloud, Products & Platform have been included. Infosys also aspire to do atleast 15% local hiring abroad to build a truly global company image. Infosys 3.0 is aiming at balancing the portfolio; strengthening the core and growing new business area. Incidently the credo for Infosys 3.0 is "Building Tomorrow's Enterprise". The credo for Infosys 2.0 was "Win in the Flat World" and that for Infosys 1.0 was "Powered by intellect; driven by values". How effective has been the implementation of Infosys 3.0 is to be seen in the times to come.

Top Contributing clients

Million Dollar Clients	INFY	TCS
>US$ 1M < US$ 5M	413	538
>US$ 5M < US$10M	205	269
>US$ 10M < US$ 20M	134	182
>US$20M < US$ 50M	195	108
>US$ 50M < US$ 100M	127	45
>US$100M	14	14

Infosys seems to have a significantly higher number of clients contributing revenue between 20 to 100 Million US$. This looks favorable considering that a smaller percentage of overhead cost (compared to revenue)will be incurred to serve a smaller number of high end clients . 

Conclusion

Infosys seems to be moving in the right direction. If the Infosys3.0 strategy is to click and bear fruits; we will see Infosys regaining its bell-weather tag. Acquisition of Loadstone; announcing salary hike for employees and keeping a low profile and cautious approach to the future might just work well for Infosys. TCS on the other hand is at the peak of its success and the expectations have already gone through the roof with its shares valuated at more than 14 times premium. Will be interesting to watch out for the last 2 quarters of the FY 13.

Note: The opinion expressed on the blog are my personal views. The data for the analysis has been sourced from the quarterly results published by both the companies on their websites.