Why Infosys needs to change its strategy

Infosys' fourth-quarter numbers are far below expectations. The stock tanked more than 21%, dragging benchmark indices down with it. It added a mere $28 million in revenue for the quarter, almost all from Lodestone, the Swiss consultancy firm it bought in 2012 for $350 million. 

About its numbers, brokerage JP Morgan had only this to say, "Disappointing on all counts." Infosys had predicted dollar revenues to grow by 5%; they grew a miserable 1.4% quarter-on-quarter. What is more worrying, most of the growth in revenue came from rising onshore volumes, a result of the Lodestone acquisition. Offshore volume growth was negligible. 

Analysts had expected Infosys' margins to contract: JP Morgan by one percentage point. Actually, margins are down 2.1%. Most of the contraction, it can be assumed, has come from deep price cuts forced by competition. 

By the company's own reckoning, the future looks bleak. At a time when IT lobby Nasscom projects the industry to grow between 12% and 14% in 2013-14, Infosys has set the bar far lower for itself, predicting growth between 6% and 10% in the current year. Apart from the apparent lack of ambition and drive this represents, we are also puzzled by the wide range of the growth target. 

And Infosys has stopped trying to predict future earnings per share, probably because it is unsure of profits. Infosys' employees are probably gloomier than analysts. In annualised terms, between the third and fourth quarters, its attrition rate jumped from 17% to 20.4%, as people left for competitors. Infosys' plight reflects the crippling conservatism of its management, as nimbler competitors like Cognizant take away market share. 

The reaction of investors, as signalled in the markets, is clear: the management of this once-great company must change the way it works. Dependence on the US must come down and, in particular, the burgeoning domestic IT market must be tapped vigorously, acquiring an Indian company, if necessary. If change does not come from the management, it will go to the management.