Infosys back in favour

But short-termism carries a price tag

Infosys Technologies, for the second quarter of 2013-14, has reported a sharp rise in its top line, by as much as 31.5 per cent, which has beaten the 30 per cent achieved four years ago for 2008-09. The quarter-on-quarter growth at 15 per cent, on top of an eight per cent sequential growth in the previous quarter, tells the same story. The top line has been boosted by the impact of the acquisition of Lodestone last September and sharp rupee depreciation during the quarter. But still, equalling 2008-09, when the information technology industry was still riding high (the global financial crisis hit it only the next year), is creditable.

However, the bottom line tells a different story. Profits are flat, up by a marginal 1.6 per cent on the corresponding quarter last year. This has pulled down the net margin to a record low of 18.7 per cent. The positive impact of rupee depreciation has been wiped out by salary rises. But a salary rise is hardly exceptional. The bottom line has been hit by a provisioning of Rs 219 crore on account of the ongoing investigations by the US authorities into issues of violation of visa (H-1B) regulations. This is unfortunate for a company that has been a leader in the past in matters of governance. The company may be finally cleared of these charges, but things should not have come to a stage that requires provisioning. Even if the provisioned amount is written back, the net margin works out to 20.2 per cent, the lowest in recent memory.    

Despite this mixed bag of numbers, the markets have welcomed the results; the company's share price has gone up by 4.7 per cent. This is because the numbers have beaten expectations and the company has got out of its recent habit of missing its own guidance. Additionally, Infosys has revised upwards the lower end of its guidance for the whole year. There is, in fact, a sense of dejà vu as some analysts see a deliberate attempt at conservatism in the guidance, which they feel is likely to be beaten by the actual numbers. This return to normal, so to speak, is symbolised by N R Narayana Murthy being back at the helm. Under him the company is again being effectively led, large deals are being quickly closed and even the departure of two top managers does not seem to have affected morale. But he is a mortal and cannot be expected to bail out the company periodically. Thus, after steadying the ship, his major task will be to install an effective system of succession. What he left behind last time did not work.

But there is a cost to the turnaround. Infosys is back to focusing on the traditional big-ticket time and material business. The correct long-term strategy of going in for high-technology work in fields such as cloud computing, wireless and analytics, which produces non-linear growth and raises margins, has taken a back seat. Pleasing markets that are wedded to short-termism at the cost of laying the foundations for becoming a global technology leader is, well, short-sighted.