'Higher Wages, Big Strength To Blame Infosys Poor Status'

By Ravindran Shetty | Bangalore

India's second biggest outsourcer Infosys has posted weaker-than-industry growth numbers along with a sharp fall in margins over the past 2-3 years. Unsurprisingly, the company lost its pole position as the bellwether of India's IT industry to bigger rival Tata Consultancy Services.

Now, days before the company reports its December quarter results, Barclays has published a report blaming Infosys' underperformance to wage hikes, lower utilisation, ageing employee pyramid and sub-contracting.
Infosys EBIT or operating margins fell by 660 basis points or 6.6 per cent, from 30.2 per cent in September 2010 to 23.6 per cent in September 2013 due to these factors, Barclays analysts Bhuvnesh Singh and Hitesh Das said.

According to the report, between 2010-12, Infosys focussed on discretionary projects (such as consulting), which reduced visibility on revenues. This was also the time when Infosys' biggest markets - US and Europe - were in the midst of a sharp economic slowdown and discretionary budgets fell sharply impacting growth.

Lack of focus on large "bread and butter" IT contracts adversely impacted utilisation rates and bench strength rose sharply. As a result, Infosys employee base increased by 25 per cent between September 2010 and 2012 though revenue grew by only 20 per cent during the period, the brokerage says.

The number of employees at the bottom of the pyramid came down as growth weakened. But employees at the mid and top level swelled as the average age of employees rose. According to Barclays, 15 per cent of Infosys employees were over 30 years in age in March 2009. Four years later, 27 per cent employees fell in this bracket.

The average employee age at Infosys has gone up from 25.5 years in 2007-08 to 27.5 years in 2012-13, while the average salary at Infosys is at the highest currently at over $7,000 per quarter or around Rs. 1.45 lakh per month, Barclays noted.

Finally, Infosys' sub-contracting cost went up because the company had not applied for adequate visas in 2011-12, the brokerage says.

But, there's good news. Barclays expects Infosys margins to increase by around 380 basis points or 3.8 per cent over the next eight quarters. This can be achieved by higher utlisation levels (82 per cent from 77.5 per cent currently), reduction of onsite costs through relocation of support personnel and lower sub-contractor costs, the brokerage says. 

Infosys executive chairman NR Narayana Murthy told Barclays that cost optimization could happen more quickly than the earlier guided period of 21 months.

The brokerage has an "overweight" call on Infosys with a target of Rs. 4,150, indicating 18 per cent upside from current levels.