Analysts support Infy’s move to lower margins

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BENGALURU: Infosys’ share price crashed by nearly 8% on the New York Stock Exchange (NYSE) on Friday. Something similar could happen in the Indian stock markets on Monday. It’s not clear what investors are most unhappy about — the modest growth outlook for the current fiscal, the decision to sell Panaya and Skava, or the decision to move towards lower operating margins (Infosys has always prided itself on its industry-leading margins).

But what CEO Salil Parekh is doing is exactly what several leading IT analysts have been advising him to do for some time now. Peter Bendor-Samuel, CEO of Everest Group, and Rod Bourgeois, head of research in US-based DeepDive Equity Research, have long maintained that Infosys needs to accept lower margins — and even lower growth — in order to be able to invest adequately in new digital businesses.

Bendor-Samuel believes Parekh has not gone far enough by announcing a 22-24% operating margin for the current year. “I would like to have seen him go further,” he told TOI. He believes the stock fell because “investors have had Infosys in an unsustainable equation where they expect it to move into digital, while keeping growth and margins high”. Bourgeois, too, reiterated his long-stated belief that Infosys needed to drop its margin in order to invest in its long-run position in digital/onshore services. Many digital services need to be delivered onshore, at the client site, and that raises cost.

Bourgeois noted that compared to Infosys and other large Indian firms, excluding TCS, certain mid-sized players are showing a propensity to outperform in winning digital and business outcome-oriented deals, including in the banking, financial services & insurance (BFSI) vertical. For Infosys, part of the reason for that is seen to be its high-margin strategy.

In the decision to sell Panaya and Skava, analysts see Parekh focusing more on Infosys’ core services strength, rather than develop or acquire intellectual property (IP). Bendor-Samuel thinks Infosys will stay aggressive in acquiring digital firms and may even increase its pace of acquisitions. But he expects the company “will change its focus from acquiring product and IP to one similar to that of Accenture which has been focused on acquiring the skills and permission for digital transformation”.

Tom Reuner, senior VP in US-based IT consulting firm HfS Research, said Parekh is recalibrating the go-to-market more toward services. He said doing this at the beginning of his tenure while the market is reasonably calm appears to be a prudent approach.

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