Infosys Q2: What does it show? Murthy is getting ready for war

R Jagannathan
Firstpost.com

Infosys Technologies, the laggard in the infotech space over the past two years, is finally showing some zip under golden oldie NR Narayana Murthy, who was inducted as executive Chairman in June.

In rupee terms, the 30 September 2013 quarter showed a spectacular 31.5 percent year-on-year (YoY) revenue growth (i.e. this quarter versus the same quarter in 2012) and 15.1 percent month-on-month (MoM, i.e. this quarter over the preceding quarter ended 30 June 2013).

This shows that under Murthy, the company is chasing volumes in a tough market where pricing is crucial to bagging contracts from penny-pinching clients. This is where the previous executive management under SD Shibulal, who remains CEO, had dropped the ball in its mythical search for high-value, non-linear growth in consulting, products, platforms and other business transformational avenues. The money is coming more now from the core bread-and-butter segment of business IT services.

Three factors are notable in the latest results.

One, the big jump in revenues is largely the result of the rupee's sharp depreciation during the quarter, a fact acknowledged by CFO Rajiv Bansal, who said the rupee fell 11 percent during the quarter.

The dollar report shows the rupee effect in revenue growth. As against the sharp rise in sales in rupee terms, YoY growth in dollars is down to half - at 15 percent, and MoM growth during the quarter was 3.8 percent.

Two, the company, as we noted, is chasing volumes at lower prices. Shibulal said the company witnessed "broad-based volume growth" which was the result of "our focus on execution."

This is probably code for saying that Infosys is now chasing big deals even at lower pricing to grow the topline - something it was trying to move away from in its bid to seek non-linear growth under a strategy called Infosys 3.0. In traditional IT business, revenues are directly linked to manpower and costs, but under Infosys 3.0, the idea was to develop products, platforms and solutions that would offer higher margins without huge additions of manpower and costs. The strategy did not work in the short run as clients were not in a mood to spend big on these services just yet.

This is why Shibulal and Co failed to deliver, and under Murthy the focus is back on core business, even at lower margins. The shift in strategy to focus more on business IT services shows up marginally in the second quarter, where the share is up from 61 percent of total revenues to 61.4 percent, with consulting, products, platforms and solutions showing a corresponding fall.

The net result of this shift in strategy under Murthy is apparent in the rupee and dollar bottomlines.

While net profit in rupee terms rose 1.6 percent YoY and 1.4 percent MoM in the September quarter, in dollar terms net profits actually fell sharply - by 8.4 percent quarter-on-quarter and 11.1 percent year-on-year.

Three, Infy is using its cash both to mollify investors (interim dividend is up to Rs 20 a share) and to stack up for the margin wars and inorganic growth that lie ahead. Its cash hoard went up further to Rs 26,907 crore from Rs 24,078 crore in the previous quarter. Even after considering the rise in interim dividend, the payout continues to conservative, suggesting that spare cash is being kept ready for other uses.

The market, which pushed up Infosys prices soon after the results, is celebrating this return to animal spirits under Murthy. It is happy that Infosys is back in the game by getting ready for combat on the price front. The fall in dollar profits indicates that the battle for margins will get sharper in the year ahead.

The company has projected revenue growth of 21-22 percent in rupee terms for 2013-14 and 9-10 percent in dollar terms.

One could see this trend accelerate in the coming quarters as Infosys shifts gear further to ensure that Tata Consultancy, HCL Technologies, and Cognizant do not run away with the volume glory.

Infosys’ second quarter results suggest that Narayana Murthy is donning battle-gear to fight for market share.

The writer is editor-in-chief, digital and publishing, Network18 Group