Analysts, shareholders think Infy is slipping

The conservatism that served Infosys Ltd so well for three decades is now stunting its growth, prompting calls from investors for new blood at the top of India’s showpiece outsourcer.

Critics say Infosys also must shed its aversion to acquisitions, change its premium pricing strategy and make better headway in higher-end businesses like consulting to compete with global rivals IBM and Accenture.

“It’s one thing to get to the top and it’s another to stay there. Infosys is clearly struggling to stay there,” said Eric Mookherjee, a Paris-based fund manager for Shanti India, which holds Infosys shares.

The Asia Pacific Equity Research arm of J P Morgan also had serious reservation about Infosys’ future performance. In a recent report on the company it pointed out that Infosys is losing its pre-eminent position because of its inability to walk the pricing versus volume trade-off, constantly and lamely blaming the environment for the volatility in its performance (such as change in leadership in its clients). J P Morgan also felt that Infy’s weak positioning in the bread-and-butter service offerings such as BPO, Testing & Infrastructure-management and being rigid on pricing premium in engagements where flexibility was the essence, all contributed to its lacklustre performance compared to other large IT companies. 

“We believe in multi-vendor situations, particularly in relatively mature verticals such as BFSI, Infosys is losing its market share. In ‘bread and butter’ offerings (such as ADM, Infrastructure management, BPO) there is limited opportunity for differentiation, hence Infosys’ premium-pricing disadvantage helps peers to eat into the company’s market share. We believe players such as Cognizant, TCS and Accenture are growing partially at Infosys’ cost” the J P Morgan report said.  

The first signs all is not well at Infosys came a year ago with a disappointing sales forecast and the unexpected resignation of an executive many had expected to be its next CEO and the first from outside its fabled group of seven founders.

“For years, we loved Infosys for consistently delivering more than they promised and now we are seeing just the reverse,” said Mads Kaiser, a fund manager in Denmark at JI India Equity, which holds $200 million in Indian shares including Infosys.

“They are having real problems and it is not just external because it hasn’t impacted its rivals much,” he said. 

The seeds of Infosys’s current woes may well be the unwritten pact that each of its core founders get a shot at running it. Chief Executive S D Shibulal is the company’s fourth, having taken the helm last year from fellow co-founder Kris Gopalakrishnan. Shibulal, 57, was previously the chief operating officer.

“The company has had two operational leaders and operational leaders tend to make a company very inward focused,” said a senior executive at a technology company who previously worked at Infosys and declined to be identified.

With about 150,000 employees and $7 billion in revenue, Infosys has long been number 2 to Tata Consultancy Services, but was seen as the sector bellwether for being the only member of the top 3 to provide year-ahead guidance, which it usually exceeded. Now it is feared that Infy may also lose its second position as Cognizant Technologies is likely to surpass its revenue figure in the June quarter.

Critics say Infosys is overly focused on service delivery and not enough on sales; that it is slavish to preserving margins at the expense of winning new business; that its core service offerings differ little from those of the competition.

Smaller rivals Cognizant and HCL Technologies are winning market share partly due to Infosys’ reluctance to lower prices in a tough market. 

Some fund managers, who are also shareholders of Infosys, also feel that the company should return a part of the huge unutilised cash pile to its shareholders.