why investors are unhappy with Infosys

“We believe players such as Cognizant, TCS and Accenture are growing partially at Infosys’ cost,” J P Morgan, a global bank said in a note on Infosys last week.
Last week, a technology analyst at Credit Lyonnais Securities, a foreign brokerage associate of French bank Credit Lyonnais, put out a report on Infosys that caused a stir. The analyst wrote an open letter to Infosys CEO S D Shibulal highlighting three major investor concerns. These include loss of market share, reduced business predictability and lack of a clear roadmap for cash usage. At a time when it needs to ramp up hiring in US to get big ticket transactions, it is facing investigation over visa issues.

Here are five reasons why investors are miffed with Infosys:

• Loss of revenue market share:  Infosys is protecting profit margins even if that means it is losing on the revenue growth. Over the past five years, Infosys has lost 3.5 per cent market share in the overall IT services revenue pie to competitors like TCS, Accenture and others. The company’s profit before interest and taxes (PBIT) has also witnessed a decline in the overall IT sector share. Infosys has shed 3 per cent PBIT market share, CLSA argues. This is a major concern. Traditionally, companies that gain revenue and market share, deliver higher profits and eventually higher shareholder returns.  “We believe players such as Cognizant, TCS and Accenture are growing partially at Infosys’ cost,” J P Morgan, a global bank said in a note on Infosys last week.
  
• Reduced business predictability: The ‘Infosys guidance’ is a significant event. Infosys has used the quarterly guidance to manage expectations from investors. “Under promise and over deliver” has been the mantra of the company founded by N R Narayana Murthy and Nandan Nilekani. This means the company saw the business growth prospect from contracts it pitched for and won for IT services. It then put out a conservative revenue and profit estimate and consistently managed to top it. However, lately, Infosys has missed on targets set in the quarterly guidance. For two straight quarters now, the Infosys revenue growth fell well short of the quarterly guidance. For the quarter to March 2012, it has achieved a first by missing on the earnings per share growth target. In short, managing expectations in an uncertain global environment is getting increasingly difficult.

• Infosys $ 4.1bn cash: Infosys has rarely articulated any strategy to use the $ 4.1bn cash hoard. The company has grown organically and has no experience in growth through transformational acquisitions. Investors do not see any significant capital deployment in generating revenue too. It is natural that they would want the company to return the money either through dividend or buyback of shares.

• Return on equity:  Return on equity is a tool that is a ratio of profit and the company’s equity. It is an indicator that shows how the company is using shareholders’ money. In 2005, Infosys ROE was 44 per cent. It has slipped to less than 29 per cent in 2012. Analysts say that this is largely because Infosys is hoarding cash not needed. Even a global IT services giant like Accenture has a ROE of close to 70 per cent. This is perhaps the reason why Infosys is the worst performing IT services stock in the past 4 years.

• Big revenue needed:  Indian IT services companies were supposed to grow their consulting revenue while offering cost effective offshore IT services delivery model. While foreign IT services giants like IBM Consulting, Accenture and Capgemini have managed to match prices of Indian IT vendors, Infosys and other Indian IT companies have not managed to build a consulting practice that gives confidence to Fortune 500 companies. The reinventing or transformation of the company that Infosys MD and CEO Shibulal spoke of could take longer than expected. For now, the reality is that Accenture’s profit per employee is as good as Infosys. With the ongoing investigation by US authorities, there is uncertainty over the quantum of penalty that could be imposed on Infosys. The company needs more staff in US to ramp up sales growth. Visa issues could slowdown aggressive tactics needed to achieve that growth.

Source http://profit.ndtv.com/