Infosys – Challenge Before Sikka

Infy – Understanding from fundamental perspective. 

infosys before sikka

This is purely a fundamental outlook of Infosys & written to understand the underperformance of Infy. Change guard is a positive step  but there are various challenges before him.  Few research report are –

IDirect_Infosys_Update_June2014 (1)

InfosysCompanyUpdate120614

Infosys has announced the selection of Dr Vishal Sikka, the former SAP executive board member, as its new Chief Executive Officer and Managing Director (CEO & MD), effective August 1, 2014, for a period of five years. The key issues before him are 1) inefficiency of capital (ROE) 2) huge cash pile & not able to do grow (organic or inorganic) 3) clearly missed few bus in last five year.Infosys has clearly missed few growing areas in last five year. There are several issues  before Mr Sikka. We tried to highlight few of them. TCS & Contingent is far more sweetly placed in this sector & efficiently managed.

 

Challenge Before Sikka

Infosys is led by well educated and highly qualified professionals and industry veterans. The company’s management helped its to ride through the sub-prime crisis waves successfully by implementing right strategies and frameworks.  But at present , few challanges before him are –

 

1)   Last 5 year performance does suggest some company-specific challenges 

Last 5 year under performance does suggest some company-specific challenges for Infosys. – Infosys has been laagered (compared to it peer Cognizant or TCS) in charting its longer & medium term vision.

2)   Secondly, Infosys has clearly missed few emerging areas of growth such as Social Media, Cloud technology etc.

3)    Out of Murthy’s three prolonged strategy, only cost optimization is working out.  Other is not showed

  • Infosys is still repairing its core, because of which it might lag behind peers on the next generation agenda such as SMAC (Social, mobile, analytics, and cloud) technologies. This could be signification areas of interest.
  • The sectoral growth scenario is certainly very positive & demand environment is likely to be robust. However, Infosys has failed to capture it in last five year like other significant IT peers (strong underformance).  We are sceptical about management & leadership.
  • Management points to a weakness in revenue growth momentum across verticals. 

 4) Return On Equity (ROE)

From 40, % in 2006, the return on equity for Infosys was down to 28 percent in 2012-13. During the past 13 years, Infosys Ltd’s highest Return on Equity (ROE) was 42.32%. The lowest was 12.46%. And the median was 30.21%. Investors generally are interested in companies that have high, increasing returns on equity.

 

Date ROE % change
March 31, 2014 24.17% -1.51%
March 31, 2013 25.68% -2.15%
March 31, 2012 27.83% 1.37%
March 31, 2011 26.46% -2.61%
March 31, 2010 29.07% -5.51%
June 30, 2009 34.58% 0

Reason for decrease in ROE is primarily due to 1)     Continuous dip in operating Margin 2)     High Cash on books and usage of cash

5)   Continuous dip in margin

After analyzing the margin, our interpretation is that there has been a constant decline in margin especially after Lehman brother crisis, 2009.  During FY09-14, Net margins declined 357bps to 21.24% vs. 24.81% in FY09.  This was due to slower revenue growth &  deterioration in overall operational efficiency.

 

Annual Financials for Infosys Ltd. ADS
Fiscal year is April-March. All values INR millions.
2011 2012 2013 2014
Sales 275 337 403.52 501.31
EBIDT 115.85 130.07 141.25 181.81
Gross Income 68.23 82.32 94.29 106.48
119.45 145.83 165.01 186.35
GPM (%) 42.13% 38.60% 35.00% 36.27%
NPM (%) 24.81% 24.43% 23.37% 21.24%
Source – Marketwatch

 

6)    Inefficiency

The margin has declined both at gross level & net level. However, in this quarter (Q4FY14) has been a healthy increase in margins. On the longer term, there has been a constant decline –

  • Inefficiencies (capital) due to several new areas of investment – Infosys, after 2009, have tried different business vertical & has investment phase in various areas like consulting, products and platform. Pressure on margin from these “Inefficiencies” has been compounded by upfront margin-dilutive deals in traditional space. I think it sums up everything.
  • Cost pressure – on longer term perspective there has been a constant pressure on the wage bill (peer pressure) & increase in visa cost in last 5 year.
  • Utilization level (manpower) – the Utilization, which was at 81 % (Fy11) has reduced to 71% (Fy 13). Though it has improved to 77% in this quarter.
  • Pricing pressure – Since Infosys has been a leader in “Financial services” after Lehman crisis, there has been a constant pricing pressure from its client, which is understood.Since Infosys , has higher BIFS contribution from US & now Europe after lahman brother crisis  there was a pricing pressure.
  • This quarter EBIT margins increased 50bp Q/Q to 25.5% in 4Q FY14 after increasing 150bp last quarter (up from 23.5% in 2Q FY14 to 25.0% in 3Q FY14).  This quarter, they focused on “cost optimization” which is low hanging fruits.

 

The company should be able to do margin expansion in coming quarters as it comes out of “margin degradation” cycle. There is scope to streamline cost, delivery Excellencies. 

7)    Huge cash pile – High Cash on books and usage of cash

Another factor which is bothering investors is Infosys’ huge cash pile of more than $4 billion, This has been the reason for depressing the shareholders’ returns. Excess cash will dilute return on equity (ROE).  The concern is not because of performance and lack of use of cash. Below cash flow will analyze the huge cash which is lying in the books. There has been phenomenal growth in the cash & that too in the short term which may not necessary earn any return on Investment.

infosys before sikka

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Seriously looking out for your suggestion & can be reached me at bonpriya@gmail.com.Data are basically $ denominated .

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One Comment to Infosys – Challenge Before Sikka

  1. […] Infosys has recently appointed Mr Vishal Sikka as CEO of the company. Infy – Understanding from fundamental perspective.  This is purely a fundamental outlook of Infosys & written to understand the underperformance of Infy. Change guard is a positive step  but there are various challenges before him. http://www.einfomet.com/infosys-challenge-sikka/ […]

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