Infy's turnaround performance: Is it Murthy's magic or cost optimization outcome?

BANGALORE, INDIA: Former IT bellwether company Infosys seems to be making a turnaround or is it so?

The IT Service major has not only delivered a closer performance to their guidance but also bettered the margin growth. The question is: whether the margin growth achieved out of cost optimization is a sustainable in long run?

If one has a closer look at the Infosys performance (fourth quarter results), the margin enhancement is a result of cost optimization drive, which has come primarily due to few senior exit and reduction in staff cost involved.

However, Infosys (INFY) gives strong recovery guidance with a 16pc CAGR growth for the period of 2014 to 2016. Is it an old midas touch of Murthy or just a coupled outcome of cost optimization and slightly positive market spends?

It's obvious that the cost optimization initiative is the only visible working factor and we have seen the results of this in the last couple of quarters. While other growth levers like PPS (Products, Platform & Solutions) strategy, productivity enhancement initiatives (around from delivery) and sales effectiveness (around account mining and sales growth) in the mid and large deal is not really kicking in to drive growth for Infosys.

The PPS initiative did not witness any growth and on contrary it declined by 5.1 percent compared to previous quarter along with few verticals like Retail, HealthCare and Life Sciences also declining. With senior level exodus and leaner sales and support team keeping a deal pipeline stronger and intact would be challenge for Infosys.

We have seen a historically low spend on the sales and marketing spending in last few years, higher attrition rate and over reliance on the US market all could toughen the task in hand for Murthy and team.

There can be further reduction in cost for next few quarters by reducing off-site cost and providing delivery efficiency, which could help in holding the margin enhancement. However, they might not be a long term solution and they might have to reconsider and start their investment into sales and marketing to provide maximum coverage and to penetrate into newer verticals and geographies like Continental Europe etc.; since North America is declining for them and other competition too.

There is better performance in INFY's BITS (Business IT Services) but it needs to be more broad-based to provide more predictability into revenue growth for future. It's difficult to have the same visibility around volatile business like Consulting and System Integration revenues.

With many odds stacked against this former IT bellwether, the question is whether Infosys will leverage on the growth opportunity while fixing its core business? Which is going through a transformation?

The ICT industry analyst firm CyberMedia Research analyst Apalak Ghosh comments: "It's very important to strike a balance between urgent and important, while addressing the urgency of margin expansion by cost rationalization and at the same time taking steps towards important initiatives to leverage on the high growth future opportunities around emerging technologies like SMAC (Social, Mobility, Analytics and Cloud) is a tight rope walk."

There are many opportunities like Obamacare and ICD 10, which will open-up the IT spend in Healthcare and you can witness a positive outlook on the manufacturing and telecom too. However, it's going to take time to revive Infosys back to its growth terrain. It will be slow growth for Infosys and new norm for them unlike their past.