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Infosys cutting prices to boost volumes, says JP Morgan

Once the tech bellwether, Infosys, has been hit hard by the global economic downturn in the last couple of years. With clients postponing discretionary spends, Infosys' volumes took a hit.

December 25, 2012 / 11:02 AM IST
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Moneycontrol Bureau

Once the tech bellwether, Infosys, has been hit hard by the global economic downturn in the last couple of years. With clients postponing discretionary spends, Infosys' volumes took a hit.

Yet, it continued to focus on margins, even as rivals like Tata Consultancy Services, Accenture and HCL Tech chased volumes. But now, it seems, the Bangalore-based IT giant is waking up to the harsh reality and leaving no stone unturned to get its business back on track.

And the biggest change could be that it has now quitely started focusing on getting volumes back, even if it means being more negotiable on pricing.

Infosys' head of sales &  marketing Basab Pradhan, confirmed to JP Morgan last week that the company has indeed become relatively flexible in pricing for volume growth.

"Pradhan confirms Infy is relatively more focused on volume growth even through aggressive pricing. Infy is also much more responsive to negotiations with clients. It realizes that clients' perception of Infy being relatively rigid in negotiations was hurting growth prospects and it has taken initiatives to change this perception," said analysts Viju George and Amit Sharma.

The JP Morgan analysts believe the changed strategy to chase volumes is a step in the right direction, particularly considering the difficult market environment and Infosys's declining market share (particularly in multivendor situations).

"Though, every deal is undertaken with a target margin profile in focus, but this target margin is now lower than earlier, in our view. Also, Infosys is responding to requests for proposals more aggressively than earlier. Our channel checks suggest that the pricing flexibility has helped Infosys improve its win rate over the last 1-2 quarters."

And that chase for volumes, while being more flexible on pricing seems to reflect in its EBIT (earnings before interest, taxes) margins, which have declined 350 bps over the last two quarters.

Apart from focusing on volumes, the company has also taken multiple initiatives in sales and marketing to drive change.

For instance, on the accounting side, it now motivates employees to focus more on global-2,000 accounts with potential of meaningful revenue contribution over a period of time. It has also implemented the star account programme, where senior client partners focus on one key account and not multiple accounts, JP Morgan notes.

Things, however, are unlikely to change for Infosys overnight. The demand environment remains uncertain and the company admits that client budgets are not as sacrosanct as before.

Also, Infosys has "meaningful" exposure to capital market clients, who were the worst hit in the recent financial crisis and visibility on IT spending from these clients is very low, say George and Sharma.

Infosys, which has had a string of poor results in recent quarters, cut its EPS guidance for the full year in October, which is now expected to be at at least USD 2.97, down from USD 3.03 it had forecast earlier, following rupee appreciation.

It also lowered its full-year rupee EPS guidance to Rs 160.61 from 166.46.

Infosys is also expecting only 5 percent growth in US dollar revenues for the full year, much lower than 11-14 percent growth expected by industry body NASSCOM. Som Mittal, the president of NASSCOM said last month that growth will still likely be in double digits but probably closer to 11 percent, the lower end of its guidance.

While Infosys may still be uncertain of the road ahead, the JP Morgan analysts say their conversations with peers like TCS, suggests that demand will pick up and 2013 will be better than 2012.

Infosys may have changed tracks, its still likely going to be a slow catch up. The company will announce its third quarter results in January, and many analysts expect Infosys will cut its organic growth forecast  to below 5 percent, given cut back in spending by clients and delays in closing deals.

Infosys closed at Rs 2,322.30, up 1.1 percent on NSE on Monday.  JP Morgan has a target of Rs 2,400 on the stock.

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