Friday, April 12, 2013

No Surprise behind Infosys’ Big dip in stock price: Reading the tea leaves

Scanning the news headlines on offshoring giant Infosys’s big dip this morning, I was reminded of the old Phantom "jungle saying" from Phantom comics I used to read growing up: “Biggest tree makes most noise when it fallsEmploying 155,000 people, with revenues of over $7.23 Billion, Infosys is certainly a large tree. Though it has by no means fallen, a dip of 20% for a public company in a day is no small matter.

It has been more than a year since I moved from Infosys to the buy side of offshoring, taking on the role of an Enterprise Architect for a multinational organization. I continue to watch for trends and developments in the sell side, primarily on the state of offshoring firms. I have also been reflecting on the sustainability of the offshoring business model that hinges on recruiting fresh talent (“resources”) and operating on ever thinning margins. Two recent books "That's I.T" by Ramesh Revuru, a former Infoscion (my review) and "Offshore: India's Services Juggernaut" (my review) by Basab Pradhan who heads Global Sales & Marketing at Infosys provide contrarian bottom-up and top-down views on the business of offshoring. Basab’s views analyze the business model and potential "opportunities" while Ramesh takes a hard look at some of the operational challenges. (hyperlinks are to my reviews)

Not so long ago, Infosys was THE bellweather for offshoring, enjoying larger margins and client bill-rates by promising consistent, quality delivery. "Infosys is considered a bellwether for India’s outsourcing industry, which has been hit by weakness in the world economy. The industry provides information technology and business support services to companies from Europe to the United States." – WashingtonPost

The internal focus would be on maintaining high operating margin on every project/program/contract while trying to increase footprint at existing client locations. The intent of moving towards new revenue models and consulting continues to be aspirational while the bread and butter still comes from vanilla application development and maintenance (a.k.a ADM). All this while other service firms continue to grow their share in an increasingly limited global offshoring pie.

Although I was surprised by the INFY news and market reaction to it this morning, I guess there is not too much to be surprised if one were already reading the tea leaves. Just a sampling of the recent theme in the media:
  • Questions on Business Model: A few months ago, there was an interesting piece in Economic Times analyzing “Will the last promoter-CEO S D Shibulal succeed in creating a new Infosys?” The answer so far has been no. And if one reads the tealeaves on today’s stock market knockout taking 20% off the value of the firm, it is a resounding No!
  • Rumbling on slowdown in hiring, a canary in the offshoring coalmine if you will. (Hiring activity in IT sector may be muted this year: Infosys - Ref Business Standard)
Bottomline: Infosys and other offshoring firms “trained” the market to aspire for a 15-20 percent growth rate which was certainly practical when they were smaller. As offshoring firms get larger and less nimbler, the rate of growth (obviously) is not sustainable. When Infosys “forecasts” revenue to grow between 6 percent and 10 percent for the fiscal year ending March 2014, it sends shock waves in the industry. Should it shock those reading tea leaves at all?