Infosys challenge is to revamp its business model

Indian IT icon Infosys always preferred bigger profits over higher revenues. But over the last three years, its larger rival TCS has overtaken it in both revenue and profits.

Since Thursday, after both companies announced their results, the Infosys stock has been pummelled, while TCS has stayed in the green. TCS' results beat market expectations, Infosys' did not.

TCS has beaten Infosys in both revenue and profit growth. Over time, investors have grown comfortable with the ritual of Infosys predicting its future earnings expectations, its 'guidance'.
Like all rituals, this has become devoid of meaning: in the middle of a global economic crisis, predicting future outcomes is futile. Infosys recognised this and said it would make no prediction about the next quarter's numbers. It also said that revenues would grow around 5% over the full year.

Investors are disappointed, because Infosys seems to be lowering the bar for itself — it had earlier predicted revenue growth between 8% and 10% and IT industry lobby Nasscom expects the sector to grow 11-13% this year. Nevertheless, at 28%, the margins of Infosys are better than TCS' and still the best in the industry.

The big question now is whether it can pursue its high-profit, low-volume strategy in the face of relentless competition. Infosys' main revenue earner, its financial services, has become commoditised: almost any IT vendor can do what it does, and some can do it cheaper.

In recent years, Infosys has talked about doing more complex, specialised work customised for particular clients. Here, it faces formidable rivals, like Accenture, IBM and Sapient, which dominate the IT consulting market.

A close look at its results shows that it has struggled to grow this business: its consulting and platforms revenue actually fell last quarter. Clearly, Infosys will have to change its business model to keep growing. How quickly — and successfully — it does that will be the real test of its management.