Infosys, Wipro may have to sacrifice margins to compete

BANGALORE: It is not Cognizant’s strong growth that leaves it as the odd one out in the industry. Rather it is the lagging performances of Infosys and Wipro that diverge from the larger industry growth trajectory.
While Wipro’s revenues in the June quarter grew 17% and profits 0.9%, for Infosys the corresponding numbers were 23% and 15.6% respectively.

This comes at a time when leading players in the industry are seeing over 30% revenue growth and over 20% profit growth.

Some analysts say that Infosys’s limited success in either moving up the value chain to higher billing rate services (consulting, enterprise application services etc.) or scale businesses at the low end of the billing rate spectrum (remote infrastructure management, testing, BPO) are affecting its growth.

The company also has a large exposure to the telecom sector, a vertical that has seen tepid spends in recent times. It has a small exposure to the fast growing healthcare vertical.

Infosys has more recently introduced a strategy that seeks to address these concerns. It aims to achieve a revenue mix that is equally split amongst traditional strategic global sourcing, consulting & business transformation, and innovation (involving products & platforms). The company says it is transitioning from a technology solutions company to a business solutions company , proactively helping clients build their enterprises.

It is also focusing on fewer verticals including banking, financial services and insurance (BFSI), manufacturing, energy, utilities and telecom, retail, consumer packaged goods, logistics and life sciences and public services and healthcare.

Karthik Ananth, director in management consulting firm Zinnov, said that the restructuring is focused towards customer centricity and innovation . “This is definitely in the right direction . But like all restructuring efforts, it will take time for one to assess the true impact of the changes made,” he said.

Analysts also say these changes necessitate higher investments in the medium term in sales and marketing, and higher salaries.

But this could imply lower margins for a while, something that Infosys has been averse to. How the company manages this apparent contradiction remains to be seen. “Although, management continues to indicate that it is business as usual and the company has performed well, we feel investors should assume a longer road to recovery in performance ,” a report by brokerage firm Ambit Capital said.

Wipro’s primary effort has been to simplify what it sees as a complex organization structure. The company discontinued its joint-CEO system, reorganized its structure (which led to the exit of many executives) and narrowed its vertical focus. The attempt is to become more nimble and increase speed of decision-making .

Wipro has had relatively low exposure to higher growth verticals like BFSI (27% of Wipro's revenue in FY11, compared to 40% for TCS and Cognizant ) and relatively high exposure to lower growth verticals like telecom (17% of revenue). Likewise, it has a relatively high exposure to R&D services (14% of revenue), where spends have lagged IT services.

Kuldeep Koul and Ashish Chopra, analysts in brokerage firm Motilal Oswal , said in a recent report that Wipro’s more diversified exposure to verticals is beneficial to it from a long-term perspective . “However, inthe context of current spends, its exposure puts it at a disadvantage ,” the report said, implying for instance that it has been adversely hit by its low exposure to BFSI.

Some also see Wipro as the least aggressive amongst its peers in new client acquisitions. An industry analyst said that the company’s commitment to maintain high margins has affected its ability to invest in customer relationships , business expansion, building sales teams and marketing engines. “The company must give greater emphasis on marketing spends if it has to keep up with the rest of the top-tier companies ,” the analyst said.