That Infosys, once the bellwether technology stock, is having
structural problems, has been in the news for nearly a year. But the
fact that the company has been losing its leadership position on a
number of counts like revenue, market cap, net revenue and earning
before interest, tax, depreciation and amortisation (EBITDA) for nearly
two years has been not so well known.
Kotak Securities, in its report titled ‘What’s ailing Infosys’ says that on a relative market share basis Infosys has lost market share on all the four counts. The top five companies being considered are Tata Consultancy Services, Wipro, Infosys, Cognizant and HCL Tech. What is further depressing is that the market share of the company is at a multi-year low and most of this market share has been lost over the last two years.
In order to arrive at the calculation of market share, Kotak Securities has used data since September 2004, coinciding with the listing of TCS. No adjustments have been made to account for acquisitions, and thus the comparison is on purely on an organic basis.
On the profitability front (EBITDA), Infosys’ market share (among the five companies) has dropped from a peak of 30.7 percent in December 2008 to 24.4 percent in June 2011. Its share in net income has fallen from a peak of 33.6 percent in March 2009 to 24.8 percent in June 2011.
While
share in market capitalisation has declined from 37.5 percent in March
2009 to 25.2 percent, its relative price to earnings ratio (defined as
market capitalisation per share divided by net income share) is down to
1.02 against 1.26 in June 2010.
Kotak lists four major reasons for Infosys’ loss of momentum and market share.
One was the poor response to demand recovery post downturn. According to Kotak, there were several problems here, including “lower aggression on the front-end, meaningful deal losses, especially in Europe, poor bench management (composition of bench was the issue, not utilisation levels), and relatively lower flexibility on pricing and deal structures.” In short, Kotak believes Infosys hired the wrong people for its bench.
Two, there were troubles at a former top account (British Telecom). “Even as Infosys has done a commendable job of mitigating the impact of sharp revenue loss at BT, it has impacted relative performance.”
Three, the reorganisation (into industry-focused verticals) has been stretched. This, coupled with the change of guard at the top and the board levels, “has led to a loss of focus at times.”
Four, there has been too much focus on certain type of deals – “high value-add, consistent with Infosys 3.0 imperative.” Relatively lower flexibility in pricing and deal structures have also added to the slippage in the company.
Is this a temporary phenomena or a structural one? Kotak believes Infosys is making all the right moves. The revamped organisation structure needs to deliver as well as the company needs to balance pricing/profitability for volumes.
Infosys has lost the bellwether status to TCS, though the valuation gap between the two is still narrow, from where things stand it is likely to widen further before Infosys gets its act in place to reclaim the status.
Kotak Securities, in its report titled ‘What’s ailing Infosys’ says that on a relative market share basis Infosys has lost market share on all the four counts. The top five companies being considered are Tata Consultancy Services, Wipro, Infosys, Cognizant and HCL Tech. What is further depressing is that the market share of the company is at a multi-year low and most of this market share has been lost over the last two years.
In order to arrive at the calculation of market share, Kotak Securities has used data since September 2004, coinciding with the listing of TCS. No adjustments have been made to account for acquisitions, and thus the comparison is on purely on an organic basis.
On the profitability front (EBITDA), Infosys’ market share (among the five companies) has dropped from a peak of 30.7 percent in December 2008 to 24.4 percent in June 2011. Its share in net income has fallen from a peak of 33.6 percent in March 2009 to 24.8 percent in June 2011.
The market share of the company is at a multi-year low. AFP
One was the poor response to demand recovery post downturn. According to Kotak, there were several problems here, including “lower aggression on the front-end, meaningful deal losses, especially in Europe, poor bench management (composition of bench was the issue, not utilisation levels), and relatively lower flexibility on pricing and deal structures.” In short, Kotak believes Infosys hired the wrong people for its bench.
Two, there were troubles at a former top account (British Telecom). “Even as Infosys has done a commendable job of mitigating the impact of sharp revenue loss at BT, it has impacted relative performance.”
Three, the reorganisation (into industry-focused verticals) has been stretched. This, coupled with the change of guard at the top and the board levels, “has led to a loss of focus at times.”
Four, there has been too much focus on certain type of deals – “high value-add, consistent with Infosys 3.0 imperative.” Relatively lower flexibility in pricing and deal structures have also added to the slippage in the company.
Is this a temporary phenomena or a structural one? Kotak believes Infosys is making all the right moves. The revamped organisation structure needs to deliver as well as the company needs to balance pricing/profitability for volumes.
Infosys has lost the bellwether status to TCS, though the valuation gap between the two is still narrow, from where things stand it is likely to widen further before Infosys gets its act in place to reclaim the status.
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