Bangalore: In a significant change of strategy, India’s second largest software services firm Infosys Technologies Ltd has said it will focus on growth, even if this means lower profitability — a reflection of a tougher business environment where Indian software firms are finding it harder to grow, and a contrarian play for a company that has sometimes walked away from deals that would have meant lower profitability.
“In the past 12 months, we had focused on margins because of an appreciating rupee and slowdown, and now we are focusing on growth,” said S. Gopalakrishnan, chief executive officer and managing director, Infosys.
Gopalakrishnan admitted that the company had in the past been “selective in chasing deals” because the “focus was on (profit) margins”.
That single-minded focus on profitability has helped the Bangalore-based company. In the three months ended June, for instance, Infosys returned a net profit of Rs1,302 crore on revenue of Rs4,854 crore as compared with larger rival Tata Consultancy Services Ltd, or TCS, which returned a net profit of Rs1,291 crore on revenue of Rs6,411 crore.
Contrarian play: Infosys chief executive S. Gopalakrishnan. Photograph: Hemant Mishra / Mint
The approach, however, may not be the ideal one at a time when the sector is witnessing a slowdown. Nasscom, the country’s software and services lobby group, expects a 4 percentage points drop in the sector’s growth to around 25% this year (2008-09). It further expects aggregate revenue of India’s software and back-office firms to reach $50 billion (Rs2.12 trillion) this year.
Infosys’ new approach is a consequence of what’s happening in the market in which it operates, said an analyst.
“By focusing on growth, they (Infosys) will be looking to add new customers as their existing clients are cagey about increasing their budgets further,” said Harit Shah, equity analyst at Angel Broking Ltd, a Mumbai-based brokerage firm.
Growth for Infosys, TCS, and their peers such as Wipro Ltd and Satyam Computer Services Ltd has slowed as customers in their primary market, the US, have, in the wake of a credit crisis-induced economic slowdown in that country, deferred or pruned their spending on new technology and applications.
Infosys has said it will look to add new customers even as it expands its presence in businesses such as health care, pharmaceuticals, logistics, energy and utilities. Currently, much of its revenue comes from four major areas: financial services, telecommunications, manufacturing and retail. The company expects to grow revenue 6% in the three months to September as compared with the corresponding period in 2007.
The emphasis on growth could mean a further dip in Infosys’ operating profit margin, measured as operating profit (or earnings before interest, taxes, depreciation and amortization) expressed as a percentage of revenue. In the quarter ended June, the company’s operating profit margin was 30.4%, down 2 percentage points from the previous quarter in the wake of higher salaries and visa costs. Over the past two years, the company’s operating profit margin has stayed in the 30-32% range.
Operating profit margins for firms such as TCS, Satyam and Wipro range between the early and the mid 20s.
Infosys’ push for growth reflects the new business reality in the software services business.
“Our existing customers are not growing and we need to find new growth engines,” Gopalakrishnan said. As part of growth strategy, the company plans to add new customers and newer service lines such as learning services and offering software as a service (where companies pay not for the entire solution but for what they use) by investing in solutions and intellectual property. The company is focusing on newer geographies such as West Asia, India, Latin America and South Africa.
Infosys, which serves customers such as British Telecom Plc. and Cummins Inc., derives about 63% of its revenues from North America, 27% from Europe and about 10% from the rest of the world including India. “We want to reduce our dependence on the US by growing operations in other geographies such as Europe and rest of the world,” Gopalakrishnan said, adding that the target revenue ratio from these three geographies for the company would be 40:40:20. He did not elaborate on the time it would take the company to achieve this revenue mix.
Infosys ended 2007-08 with revenue of Rs16,692 crore and a net profit of Rs4,659 crore. The company has issued a guidance of revenue up to Rs21,622 crore and earnings per share of up to Rs101.06 in 2008-09, a growth of 29.5% and 24%, respectively.
Shares of Infosys closed flat at Rs1,538.9 each on the Bombay Stock Exchange even as the exchange’s benchmark Sensex index closed marginally down at 14,349 points and the technology index ended marginally lower at 3,606.81 points. In the past year, shares of Infosys have touched a high of Rs2,140 each and a low of Rs1,212 each.