Infosys’s boss blames the economy but the source of its troubles is internal

Infosys’s boss blames the economy but the source of its troubles is internal

Apr 20th 2013 | MUMBAI |From the print edition

THERE was something humiliating about the latest results from Infosys, long an icon of India’s technology-outsourcing industry. On April 12th it released weak figures and said that it expected sales in the year to March 2014 to grow by 6-10%, far below the level number-crunchers had hoped for. To blame, it said, was an uncertain global economy. If true, that should have hurt all firms in the industry, but investors were having none of it. Infosys’s shares fell by 21% on the day, whereas those of its main competitors were largely stable. Lo and behold, five days later, TCS, Infosys’s main Indian rival, announced yet another sparkling set of results and said all was rosy in the world.

For Infosys’s chief executive, S.D. Shibulal (pictured), it must have been a painful moment. He is the fourth, and almost certainly the last, of the company’s founders to serve as boss, having finally got the top spot in 2011, three decades after Infosys was started in a flat. Inevitably there have been whispers that he is not up to the task and that letting the firm’s creators take turns ascending to the throne has proved disastrous. That is an overstatement. Infosys has been trounced by TCS, but over the past year its shares have underperformed India’s broader IT sector by a more modest 13%. Still, the firm clearly has problems.

One is its inability to give reliable guidance on its performance. Some 90 days before this most recent announcement Mr Shibulal said he was “cautiously optimistic” about the coming quarter. It now seems clear the firm was winging it, relying to an uncomfortable degree on new business still to be won and on squeezing more from existing contracts. Rajiv Bansal, the chief financial officer, admitted there had been “confusion”.The cat-and-mouse game of companies issuing earnings guidance and then trying to beat it is often ridiculed as meaningless by academics and corporate-governance types. But this is not the first time in recent memory that Infosys has stumbled over its forecasts. When a company consistently finds it hard to predict its own business, even as its peers manage to perform steadily, it is usually a sign something is going wrong. It probably does not help that Infosys has a muddled board, with two co-chairmen, one Mr Shibulal’s predecessor and the other a former bank boss not known for his lack of self-confidence.

For the past two years, as growth has fallen, Infosys has struggled to articulate exactly what the underlying ailment is. Issues with financial-sector customers’ demand, the timing of pay rises for staff, the sequencing of contract wins, the discretionary spending patterns of clients and the American immigration regime (which affects its ability to move staff around) have all been blamed. The causes of pain seem so heterogeneous that bad operational management would appear to be the basic problem. At the same time Mr Shibulal has promoted a long-term strategy for the firm entitled “Infosys 3.0” that is so abstract and hard to understand that it resembles a 19th-century German philosophical tract, not a business plan.

So it is a step forward that blunt talk is now the order of the day. Infosys’s central dilemma is that its prices are too high compared with its peers’, and hence its best-in-class margins are unsustainable. The firm has now admitted that it has struggled to balance the short-term preservation of profits with long-term growth. Its hesitance has put it in a sort of Catch-22. It is reluctant to have a push for growth for fear of diluting its margins. Yet the cloudier the outlook for sales becomes, the harder it is to control efficiently the costs of ramping up recruitment and investment, thereby cutting into the margins the firm was trying to preserve.

The firm now says it will stop letting profit-margin targets get in the way of winning contracts. For good measure it has stopped issuing guidance on profits, although it continues to give analysts a steer on its sales. Mr Shibulal is not the first boss to have to lead a blue-chip company to a less glamorous, lower-margin future. At least the firm is still growing and has a strong balance-sheet, with $4 billion of net cash. With a little good fortune Infosys will make the transition. But Mr Shibulal will now need a lot of luck to keep his job.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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