Did the market overreact to Infosys’ results on April 12? Now that the results of all Indian IT majors are out, the answer is yes but not for the reasons normally bandied out. The overreaction is surprising because Infosys hasn’t been taking the entrepreneurial risks to open new lines of revenue.
Infosys created the guidance tiger in India. Over the last decade it has generally outperformed its guidance and beaten analyst expectation. Each time that happened there, stock delivered good returns. Now that it finds itself on the sharp end of the stick, there should be no reason to complain.
The reason for overreaction is that investors continue to believe that Infosys is still that special company it used to be 10 years ago. This is what is most surprising. Infosys probably gets the “process” of IT services better than any other Indian IT company but is it the most innovative; the most risk-taking; the most visionary? I would think not.
Its competitors in India, be it Tata Consultancy Services or HCL Tech, or outside India, be it Cognizant or Accenture, have done things that Infosys has not done.
In 2003, when Nandan Nilekani had come for a Nasscom press meet in Mumbai, he had summed up the challenge before Indian IT services quite simply. “Accenture and IBM will try and adopt India as an outsourcing base. That will mean employing thousands of software engineers in India. Indian companies will have to move up the value chain and offer high value services,” he had said. Today, Accenture employes approximately 80,000 people in India, about a third of its global workforce. IBM has close to 100,000 people in India. Is Infosys or a TCS seen in the same light as Accenture or an IBM Global Services? Not yet.
It is here that an HCL Tech, a Cognizant or a TCS has shown some risk-taking ability to open new lines of business that has worked for them. Infosys has consistently shown a diffidence to start stuff that has the potential of adding a billion dollars over 3-5 years. About seven years ago TCS bought Pearl and then during the credit crisis bought Citigroup’s BPO units.
Today these businesses deliver close to 12-15% of its topline. HCL Tech hitched its wagon to the infrastructure management services almost six years ago. Today almost a quarter of its revenue comes from that line of business. Cognizant has focused on the healthcare vertical and close to a quarter of its revenues now come from that vertical.
So in the business model either you need a new offering or you need to find a new industry that wants your product or services. Without a new growth area or a growth driver most companies find it hard to increase profitability. Infosys is no different.
So the question investors should ask Infosys is not whether their earnings will be good or bad but what’s their next billion dollar move.