Infosys is well positioned to be a transformational

“We believe that Infosys is well positioned to be a transformational partner for large clients even as they navigate through uncertain times,” S Gopalakrishnan, CEO and MD at Infosys said.

Infosys’ detailed quarterly results presentation (and one has to thank the company for revealing more than what is mandated by law) gives a good picture of why this is going to be an uphill task.

The stock market needs to focus on these numbers going forward.

During the quarter ended June 2011, Infosys had two clients who accounted for $200 million  revenue each. Over the past one year, the company succeeded in adding one such customer. The number of clients that account for $100 million revenue is at 11 up from eight in June 2010.

The other key indicator is the growth in the consulting business. This is pretty much an indicator of the discretionary technology spending of corporations.

Infosys Consulting, a subsidiary of Infosys, which is expected to bring top clients to the company,  reported revenue of Rs 188 crore for the June quarter 2011 and accounts for about 2.5% of the total revenue. This is against Rs 173.4 crore in June 2010. The company reported a net profit of Rs 6.7 crore in June 2011 quarter against Rs 14.6 crore in June 2010.

This shows how tough it is for the company to ramp up volume in the consulting space. It reflects that the company has to use up the cash it is stashing for expanding this part of the business.

Accenture has done that consistently. For the third quarter ended May 2011, Accenture’s consulting business grew 23% year-on-year to $3.97 billion (Rs 17,800 crore). This then proves that the external environment is not that difficult.  Infosys is seeking business from the same Fortune 500 companies.

If volume growth is hard to come by, the company has to put capital behind it. Infosys has huge resources to back its talented bunch of people.

As on 30 June 2011, cash and cash equivalents, including investments in available-for-sale financial assets and certificates of deposits was  Rs 16,969 crore or $3.7 billion.

If the company cannot ramp up big ticket clientele with so much money at its disposal, shareholders should intensify their effort to seek a higher dividend.

Infosys would be a company in transition for the next four years, said Mohandas Pai, a former member of the Infosys board and HR director while leaving office.

The stock market is still hopeful that the firm will bounce back soon. No wonder Infosys shares fell 4.5% soon after the company announced its results. It is high time that everyone tones down expectations on profit and revenue growth in absolute terms for this company.

The transition phase of the company could mean a sluggish growth phase for the company. The company needs to ramp up volume growth as profit margins decline. This is possible only if it evolves as a business consultant and begins to look at offering end-to-end solutions to corporate customers and not just low-cost IT services. Experts have pointed out that this is unlikely to happen overnight. The stock market needs to treat Infosys like any other business and not expect the management to deliver super-normal returns. A guidance of revenue and EPS growth of up to 15% is reasonable as the company faces an uphill task to transform itself.