Focus on sales, not margins, drives Infosys turnaround

Analysts predict that the IT company will set a revenue growth target of as much as 12% for the fiscal year that started this month

Software services firm Infosys Ltd's stepped-up sales push, including a willingness to sacrifice margins, is helping it win business and halt its loss of market share to industry leader Tata Consultancy Services.

 

Until January, Infosys had turned in a string of disappointing results as a strategic revamp took longer to pay off than it had hoped. A spate of order wins, especially in Europe, has since brightened the outlook for India's No. 2 industry player, lifting its shares by more than 25%.
Also See | Infy to narrow gap with TCS in FY14

Upbeat comments from company executives have also led analysts to predict that Infosys will set a revenue growth target of as much as 12% for the fiscal year that started this month, roughly in line with expectations for the broader industry.

 

"We saw clients telling us that they're suddenly seeing Infosys much more active, you know, much more calls, much more executive visibility," said Sudin Apte, CEO of Offshore Insights, an outsourcing advisory firm.

 

For about two years, Infosys, a bellwether of India's $108 billion IT services sector, had been losing market share to more aggressive rivals such as industry leader Tata Consultancy Services Ltd (TCS) and No. 4 HCL Technologies Ltd.

 

The rough patch was caused in part by the challenge of implementing its "Infosys 3.0" push for revenue through the development of its own software platforms, to differentiate its services from those of its competitors, amid sluggish demand from clients in its core western markets.

 

Infosys is expected to report flat March-quarter profit later on Friday.

 

Critics also complained that Infosys was obsessed with preserving margins and needed to focus more on selling.

 

Infosys's margins, long the best in the industry, tumbled to 25.7% in the December quarter from 31.2% a year earlier and lagging those at TCS. Its renewed focus on sales is reflected in a 14% surge in sales and support staff over the nine months through December. Over the same period, Infosys grew the ranks of its software professionals by just 3%.

 

Earnings

 

Infosys beat expectations with its earnings report in early January, and since then its shares are up 25.5%, topping the industry index's rise of 18.6%.

 

On Friday morning the company is expected to report March quarter net profit of Rs 2,300, little changed from a year earlier, while revenue is expected to have risen 21% to Rs 107,00 crore, according to the average of 18 analyst estimates on Thomson Reuters I/B/E/S.

 

In dollar terms, Infosys has estimated a 6.52% rise in consolidated revenue for the fiscal year just ended to at least $7.45 billion, lagging 10.2% growth seen for the industry.

 

Industry lobby National Association of Software and Services Companies in February forecast 12 to 14% growth for the Indian IT sector in the fiscal year that started this month, and several analysts expect Infosys's revenue in dollar terms to be roughly in line with that.

 

During the March quarter, Infosys inked a five-year order from BMW AG to revamp and manage a large part of the German carmaker's software applications, computer storage networks and systems.

 

Ambit Capital analyst Ankur Rudra said the BMW deal and another from motorcycle maker Harley-Davidson Inc include a significant amount of rebadging, or bringing a client's staff onto the Infosys payroll.

 

"Deals with rebadging tend to come at lower margins. We also note that management is comfortable with rebadging and there could be several unnamed deals of this nature," he said.