Call it the Murthy effect. Infosys, once the darling of the markets and job seekers alike, looks set to arrest its descent, if the recent performance on Dalal Street is a sign of times to come.
In the valuation game it's catching up with giant Tata Consultancy Services (TCS), with the gap narrowing from a little over a third six months ago when NR
Narayana Murthy came back as
Infosys chairman to under 13%. So will 2014 mark the return of Infosys and attest to the Murthy effect convincingly?
TCS and Infosys, the leader and runner-up on the $110-billion Indian IT services landscape, are in many ways similar as well as a study in contrast. Both the icons rank among the top 10 global technology services giants.
If the third-quarter results are any indicator of the industry one thing is clear — the good times are back. More so for Infosys which has struggled since Murthy quit in 2011 with a series of surprising profit warnings that left analysts with little choice but to declare that "Infosys is no longer the IT bellwether, it's TCS."
Since Murthy's return in the summer of 2013, "Infosys has got back its mojo," says Jessie Paul, CEO, Paul Writer Strategic Advisory, a marketing advisory firm. Never mind the eight and more high flying exits in the past 12 months — from Ashok Vemuri to Paul Gottsegen, with the former joining iGate and the latter MindTree.
TCS, which counts Citigroup, Ferrari, ABN and Aviva among its 800-plus customers, has emerged as a well-oiled engine, powering ahead with its 290,000 employees.
N Chandrasekaran, the marathon runner, has taken the baton forward smoothly since S Ramadorai exited in 2009.
The Infosys stock has gained about 60% since Murthy's famous comeback. Infosys, which counts Harley-Davidson, Bank of America and Credit Suisse among its 800-plus customers, has once again compelled brokerages to change their recommendation from sell to buy.
However, if the stock is racing ahead, it's because investors expect an improvement in Infosys's financials — those expectations have yet to be met. The reality today is that TCS is ahead on the profitability front, one crucial parameter on which to compare the two giants — the difference in net margins is about 300 basis points.
But if Infosys has narrowed the gap in valuations, one section of analysts is upbeat that growth in revenues and profits will follow. Says Ankita Somani, IT analyst, Angel Broking: "This year Infosys may surprise positively after the less-than-expected performance last year when it slumped to even below Nasscom's growth projections for the industry. That surprise [in growth] will be catalyzed by Infosys' lower base effect of last year."
But there's still much more that needs to be done if the one-time bellwether has to steal its thunder back from TCS. That spans building the brand to accelerating its strategy in software platforms.
An image makeoverOne of the exits last October from Infosys was of chief marketing officer Paul Gottsegen. Since then, Infosys has not had a replacement for this key role. Says an IT industry observer who wished not to be named: "Time was when Infosys was the premium brand. TCS lacked the brand quotient but that was more than made up by its engineering prowess. However, Infosys lost momentum in investing in its brand, while TCS was happy to spend on brand building, post 2008."
TCS has John Lenzen as global head of marketing who joined the company in 2010 and took forward the campaign 'experience certainty'. Says Paul: "In sheer revenue, TCS has gone into the big league of global services firms and so has its brand value. It's in the big four — Accenture, HP, IBM and TCS." Adds Somani: "It [investment in brand] does give TCS an edge over rivals, both Indian and multinational." This edge is paying rich dividends for TCS.
Says Sundararaman Viswanathan, manager, consulting, Zinnov a Bangalore-based research firm: "TCS has over the years acquired IBM kind of ability — it is recognized as a local player in many of the markets it operates in, like in the UK. But that's not the case with Infosys." Here TCS has an edge as it can piggyback on the Tata brand as well, which is well on its way to being a global one. For instance, the Tata Group's big ticket acquisitions of JLR and Tetley in the UK have rubbed off well on TCS.
Says Paul: "All creative opponents within Infosys left in the past five years. A company needs friction within, people with contrarian viewpoints and that's not there at Infosys today. The brand has suffered a lot. The silver lining in all the exits is that Murthy has a clean slate to build the brand." Adds Viswanathan: "Decks have been cleared for Infosys to come out of the woods."
Managing an army of codersTogether, both Infosys and TCS employ roughly 4.5 lakh coders. TCS tilts the scale with almost 3,00,000 of them. But that may be beginning to become a problem.
Says Arup Roy, research director at IT advisory firm Gartner India: "TCS is becoming too bulky. Operational control could become an issue." Besides, size does not go well as a strategy when the industry is trying hard to shift to a non-linear growth model — that is, delink revenue growth from manpower growth.
TCS top brass was not available for comment and Infosys declined to comment.
But in a recent interaction with ET, N Chandrasekaran, managing director and CEO, TCS said: "We don't think we are very large. Even with this size we address just 1.5% of the global market. Besides, this is a very successful business model and it will continue." He did, however , add: "Going forward, non-linear revenue growth from a very small scale will grow much faster than the linear model. But both will grow and there's no effort on our side to restrict the growth of the current business model — it's successful , it's scalable."
In contrast, Infosys has about 1,60,000 people and has seen top management exits. Yet, the Bangalore-headquartered company has shown more determination to move to new areas that will lead to non-linear growth. The 2012 acquisition of Lodestone added to Infosys's consulting and business management software capabilities. However, utilization of employees at Infosys is lower than that of TCS. In the third quarter of 2013-14 , TCS's utilization rate was 84.5% against Infosys's 78%.
Says Viswanathan: "A smaller bench helps reduce risks if business slows down. Infosys need to increase its utilization rates." And, of course, TCS has not seen a top-level exodus as was witnessed at Infosys.
Says Manish Bahl, vice-president and country manager, India, Forrester Research: "That's Infosys' weakness. TCS is extremely stable on the HR front." Adds Roy: "Frequent changes and a mass exodus do not augur well for Infosys. There are vision-related clashes going on within Infosys."
Early this month, Infosys elevated BG Srinivas and UB Pravin Rao as presidents, while disbanding a 30-member executive council to make the top look lean and purposeful. Says Paul: "Infosys has removed the deadwood and is planting new trees. But Infosys needs a kickass kind of person among its senior leadership, which Murthy is yet to find." She cites examples of Vivek Paul who was instrumental in giving Wipro a new direction many years back and Phaneesh Murthy who helped iGate scale the game with the Patni acquisition.
New growth enginesAs traditional IT services get commoditized companies are looking at new growth engines and that's one area where Infosys has had a headstart, with its Edge platform. The platform allows customers to buy software for e-commerce, manage HR, procurement etc on a pay-as-you-go model. Infosys makes about $350 million from its software platforms and currently boasts of about 70 clients.
TCS has iON, targeted at small and medium enterprises. Chandrasekaran had told ET that TCS is planning reusable platforms for areas like telecom, financial services and data analytics. Just last week TCS announced a platform for digital commerce and customer intelligence and expects new technologies like social, cloud, analytics and mobile to offer a "multi-billion-dollar opportunity" in the next three to five years. Many of these opportunities mean that new models will emerge, contracts could be smaller and it's here that diversification — of both customers and geographies — will come in handy.
Of the two, TCS has a larger global footprint. For instance, it was the first of the two in Latin America, where it gets 3% of its total business of $11.5 billion. The $7.4-billion Infosys does not give revenue for Latin America separately. In September, Infosys LatAm BPO head Humberto Andrade quit to join global rival Capgemini.
The US market, the biggest buyer of Indian IT, brings in 53% of TCS business and 61% of Infosys's. Says Somani: "In new geographies [like Latin America], TCS has a first-mover advantage . It's more spread out and that helps de-risk better."
Apart from keeping an eye on competition the one-time bellwether Infosys has to catch up with itself as well. There's a lot more that Murthy needs to do else the forgettable performance of recent past could come back to haunt
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