India’s software firms need more artificial intelligence
Two fierce rivals. When one goes hunting for business, the other gets picky about profitability. Then they switch.
But while Infosys Ltd and Tata Consultancy Services Ltd (TCS) have presented contrasting images of each other at times, together the two big Indian software exporters have held a mirror. Analysts have used them to view global spending on those invisible lines of computer code that enable large corporations to run themselves. No longer. The picture the duo are displaying now is more about how their own industry is at risk of being overrun by robots.
Infosys operating margin
Before last quarter’s results, Infosys was doing a relatively better job of gaining investor approval. This time last year, TCS shares enjoyed a 15% higher valuation than Infosys, based on analysts’ expectations of future earnings. By this week, that had turned into a small discount.
Then on Thursday, TCS beat revenue and profit estimates for the June quarter, but operating margins shrank to 25%. That’s below the management’s targeted range of 26% to 28%, according to Bloomberg Intelligence. Infosys, which reported on Friday, cut its sales forecast for the year. Worse still, its operating margin came in at just 24.1%, extending a nearly four-year decline in relative profitability for the Bangalore-based group.
Two years ago, Infosys tapped SAP executive Vishal Sikka to take over from the founders, who all seemed bent on having a go at running the company before retirement. For a while, it looked like they might run it aground. But while Infosys has steadied under Sikka, it’s increasingly clear that the new normal for operating margins for both Infosys and TCS may be around 25%, and not the 29% to 31% that at least Infosys used to hit fairly regularly before its management merry-go-around left it dizzy.
Profitability is now capped by robots, or, to be more specific, a combination of artificial intelligence, digital technologies, blockchain and other innovations that are challenging the traditional strategy of throwing people at complex software problems and charging clients for their time. But while the large Indian vendors are themselves investing in these new areas, so much of their legacy business depends on exploiting the price difference between techies in the West and in developing countries, it’s not clear if they’ll be able to switch to a people-lite business model in time.
For the top four Indian vendors, growth in total employment has slowed to 8% levels, from 106% in the year ended in March 2012. But nimbler challengers are threatening to nibble at juicy businesses faster than the Indian companies can slim down. For instance, UK-based start-up Thought Machine has created a new, blockchain-based core banking package that resides in the cloud and won’t require expensive in-house data centers, according to a report this week in Artificial Intelligence Online.
TCS has made two acquisitions of more than $500 million in value, according to Bloomberg-compiled data. The last was in 2014. Infosys hasn’t done any of that size with its $5 billion in cash. TCS fell as much as 3.8% in Mumbai on Friday, while Infosys slumped almost 11%. The relative performance of the two is no longer much of an investment theme. Of far greater importance is how they take on those robots. Bloomberg
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