Is There Something Iffy In It?

More worryingly, there’s three quarters of faltering performance in an otherwise robust demand environment, one where its peers and competitors are minting gold. In the past 10 days, the Infosys stock, one of the most sought-after among investors in India, has tanked almost 10 per cent as investor confidence has eroded over speculation about the company’s future.

Does this then signal the end of an era for a company that symbolises India’s IT revolution? “Infosys (like other traditional IT companies) has fallen behind the requirements of the industry at present,” proclaims Arjun Malhotra, co-founder of HCL and chairman of Headstrong, one of Infosys’s competitors in the IT space. Going by the many experts and analysts who have weighed in with their views of the poor Q4 results, Infosys does have a lot to be worried about.

The immediate headlines have focused on the fractious exit of HR director T.V. Mohandas Pai, after 17 years in the company, to highlight leadership and HR issues at a company that employs all of 1,30,000 people. Although Pai is leaving to pursue other interests, he’s made his unhappiness known. In interviews to sections of the media, he has questioned the way the company has pushed founders to the company’s top positions, overlooking the experience and competence of other professionals.

Such doubts, expressed dangerously close to a new guard taking over at Infosys, leave nothing to the imagination. With S.D. Shibulal certain to take over as Infosys CEO by April end, Pai, 51, is upset at being denied a shot at the top slot in the company. In a bid to clear the air, Infy founder N.R. Narayana Murthy may have made matters worse when he said recently that Infosys values merit but supports seniority. When Outlook contacted Pai, however, he underplayed his outburst: “No, there are no issues at all...there is fair treatment to all...all credit should go to them (the founders).” Infosys did not reply to Outlook’s queries.

It might be tagged as an instance of managerial sour grapes, but it does show the leadership conflict at Infosys. That’s not good news for a company that makes money from managing its people, and young ones at that. Pai’s tenure as HR head has not been without problems. In the last three years, the company has faced one of the highest levels of attrition in the industry. In fact, attrition increased from 13 per cent in 2009 to 17 per cent in 2010 and the company has found it difficult to check it. Pai says it has come down to “normal levels”—around 13 per cent—in the past quarter.

Part of the rising attrition can be attributed to Pai’s pet project, an incentive-based HR initiative dubbed I-Raise, which focuses on building competencies and boosting productivity. It quickly became controversial and was seen by many employees as a hindrance to their career development. This led to much heartburn amongst Infosys’s employees, and word quickly spread. More recently, a Jaipur court has ruled against the company and asked it to reinstate an employee that Infosys’s HR department sacked in May 2008 after the Jaipur blasts (see box).

That said, the company’s disappointing performance has come as a shock to investors and analysts alike. For the first time in years, Infosys has not only fallen short of its guidance (a projection of earnings), but has also seen negative growth in volumes (number of projects). Worse, it has given a muted guidance for fiscal 2012, with three per cent lower earnings per share (EPS) expectation. To put it mildly, analysts are unhappy. Says Rajiv Mehta, AVP Research, India Infoline: “In every quarter, Infosys delivers over-performance on its guidance. This time it has under-performed. Worse, the company had said that volumes would drive growth. But it is price-driven and there is de-growth in volumes.”

What is surprising is that the fourth quarter disaster has come after two quarters of under-performance against Infosys’s peers like TCS and HCL Technologies, who have continued to show robust numbers. Says Mehta: “In the first three quarters, when volume growth was less than TCS and HCL Tech, everyone gave Infosys the benefit of doubt, thinking Q4 will be better. But that has not happened. That’s surprising in a good demand environment.” Adds Sanjeev Hota, AVP, IT, with Sharekhan. “There must be some pricing pressure. In the previous quarter, there was around three per cent volume growth and in Q4 it is negative.”

So what’s really wrong with India’s most sought-after company? There are clearly no quick-fix solutions here. “Infosys’s image is too much of low-cost and low-end positioning, something they need to change now,” avers Arjun Malhotra. The Headstrong CEO feels growth will not come easily in the future as a lot of companies can do cost arbitrage. Companies like Infosys need to offer everything from domain consulting to operations to be able to achieve good numbers. Says Malhotra: “You are caught in a world which is changing. Unless you build domain specialist business, you will be left out.”

Infosys has been trying for many years to set up a robust consulting arm and integrate it with their main business, but has achieved lesser success than other players like IBM. Malhotra also points out that one needs substantial on-site presence and local talent to succeed, something Infosys has not spent much energy on. Pai seems to agree: “The IT industry is going through a transformation. It has to morph into an enterprise solution-led industry rather than a project-led industry. This means domain competence has to be added to technical competence and the two have to be moulded together to give the desired outcome.”

Analysts, though, are wary of writing off Infosys—and are still hopeful of a turnaround. Says Hota: “The fourth quarter has always been soft for the IT sector. Infosys will outperform its guidance for 2012.” Of course, sceptics say that this is part of Infosys’s time-tested strategy to under-promise so that it can show better numbers. But all this will change now. There will be a new team at the helm and it has to prove its worth. For sure, Infosys will have to conjure up some magic to reclaim its posterboy slot in Indian IT.

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The star IT firm is under attack on various fronts

Performance

Despite a history of conservative targets, Infosys has under-performed them in the past three quarters. Its latest Q4 results are poor, despite good overall demand scenario

Leadership

Infosys has lost its leadership position in many segments, with competitor TCS taking a clear lead. Is seen as falling behind other IT majors on its positioning and profitability

How IT Compares

FY 2011 growth in major IT companies

Management Strife

HR head Mohandas Pai quits before new regime under co-founder Shibulal comes in, Pai hints at favouritism

Markets

Infosys stock has fallen by almost 10% between April 10 and 21

Litigation

Is facing two cases of H1B visa fraud and age discrimination in the US. Also, loss of face as Jaipur court orders reinstatement of sacked employee.

Attrition

Attrition one of the highest in industry—up from 13% in 2009-10 to 17% in 2010-11. Recent HR initiatives like the I-Raise programme not well received by employees.