Special: Here's all that’s wrong with Infosys

Infosys Technologies, India’s second-largest information technology firm, has had its share of brickbats over the past few months, though few have looked beyond slippage in quarterly growth rates.

But Kanwaljeet Saluja, a veteran analyst who red-flagged Satyam Computer Services months before India’s largest corporate accounting fraud came to light in January 2009, and his team of analysts at Kotak Securities have.

And what did they find?

At the outset, they crunched financial data of India’s top 5 outsourcers — Tata Consultancy Services, Infosys, Wipro, Cognizant and HCL Technologies —  since 2004 to compare their relative market share on four parameters — revenue, earnings before interest tax depreciation and amortisation or Ebitda, net income, and market capitalisation.

That “revealed a rather sobering story for Infosys — it has lost leadership on all these counts,” Saluja, Rohit Chordia and Shyam M said in a note. The company’s “relative market share across all these parameters is at multi-year lows, and bulk of the decline has happened in the past two years.”

Relative revenue share has been declining consistently from a peak of 25.3% in the March 2005 quarter, while Ebidta market share has fallen to 24.4% in June 2011 after hitting a peak of 30.7% in December 2008.

Similarly, net profit share has fallen to 24.8% in June 2011 from a peak of 33.6% in March 2009, while market cap relative share has fallen to 25.2% from 37.5% in March 2009.

Infosys could blame extraneous factors such as falling revenue from one of its largest clients, British Telecom, and a relatively higher tax rate.

However, there is no escaping the fact that when Infosys was mapping its route, peers TCS, Cognizant and HCL have been consistently improving their relative positioning — be it through increasing share of clients’ wallets or aggressively going for large buyouts, something Infosys has consistently shied away from.

“TCS has delivered a remarkable turnaround in its relative operational performance over the past 2+ years — its relative market shares on Ebidta and net profit market share have jumped to all-time highs from all-time lows hit in March 2009 quarter, even as its relative revenue market share has been consistent, which is remarkable in itself, given its size,” said the trio.

While analysts say the ‘jury is still out on whether this is a temporary dislocation or a structural damage,’ they believe that it is temporary and the trend will likely be reversed in coming quarters.

In order to get back in the game, Infosys recently changed its organisation structure to enable itself to be more nimble and react to market requirements faster, so as to avoid losing business to rivals.

The key, analysts say, is in ensuring that these changes deliver measurable results. More importantly, at times, Infosys will have to learn to forgo its high profit expectations to gain more business volume to keep the cash counter ringing.

“Failure to deliver, and the window is short in our view, could lead to further relative de-rating (on the street),” Saluja, Chordia and Shyam said.