Will Infosys’s reorganization efforts pay off?
One visible change: the company has become flexible in pricing
Infosys Technologies Ltd will report September quarter results on 12 October. Besides the main numbers, investors will be interested in its progress on reorganisation.
Like Wipro Ltd, Infosys is going through a reorganization exercise to align itself to a changing business environment. Named Infosys 3.0, the management expects the efforts to work out in 3-5 years. But some changes are already visible, say brokerages.
IIFL, for instance, says the company has become flexible in pricing and is participating more in traditional information-technology services contracts. This flexibility in pricing and structuring deals is leading to “higher traction" in deal pipeline and new orders, IIFL said in a 21 September note.
Unlike in linear deals, which have fixed-price contracts, non-linear business has a dynamic-pricing model. The revenue traction is directly linked to the products’ success. Going by the initial assessment of the brokerages, the initial results are encouraging.
“Some of Infosys’s non-linear initiatives are yielding results," Sandeep Muthangi of IIFL said in a note. “In our recent interactions, the management indicated increasing employee productivity at its BPO (business process outsourcing), an evolved partner ecosystem for infrastructure services and strong traction for platforms."
The non-linear business is going to be next growth paradigm for the company, Barclays Capital says. So, will the company be able to arrest the falling revenue growth in the second quarter? That seems unlikely.
The non-linear business is yet to attain scale. According to Barclays Capital, the platforms, products and solutions business currently contributes just 6% of the company’s revenues. The near term performance continues to be influenced by the regular IT services business, for which the outlook continues to be subdued.
Thus, the weak business environment is expected to weigh on Infosys’s performance in the current quarter. In a recent investor call, the company management said decision-making cycles are still slow and discretionary spending is yet to improve.
Most analysts expect margins to remain under pressure. “We continue to expect Infosys to lag peers... in the cost-efficiency segments and believe Infosys’ higher exposure to discretionary segments (~36% of revenues) will continue to drag growth," Ashwin Mehta and Pinku Pappan of Nomura said in a 6 September note.
The relatively cheaper valuation and a recent acquisition of a management consulting firm have helped Infosys’s shares gain more than its sector index. Since the announcement of the first quarter earnings, the stock gained 14.7%, almost four percentage points higher than IT index on the Bombay Stock Exchange. For the stock to continue its outperformance, the deal outlook has to improve.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!