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Problems Faced by Infosys and Recomendations
Problems Faced by Infosys and Recomendations
Dismal Numbers
Falling numbers Infosys has been delivering disappointing results for some time now. The second quarter earnings for 201213, despite being in line with expectations, failed to enthuse investors. Besides, the company's outlook of 'cautious optimism' for the rest of the year does not paint a good picture. The company has pared down its EPS guidance for 2012-13 to Rs 160.60 from the earlier forecast of Rs 166.46 in the June quarter, due to wage hikes and rupee appreciation. Ankur Rudra, analyst, Ambit Capital, says, "The company continues to lag behind its peers. The cut in EPS guidance is disappointing."
Competition
Strong competition The company has visibly lost its edge over the competitors. Its market leadership position has long been usurped by the current IT bellwether, Tata Consulting Services. Snapping at its heels are smaller, mid-tier players, such as HCL Technologies and Cognizant, which are growing faster than it. At the core of Infosys' problems is a sustained loss of market share in its bread-and-butter application development segment. The loss of market share in the traditional business is a worrying sign for any company.
Adamant Model
Rigid business model Ironically, the business strategy that defined the Infosys success story in the past seems to be playing a part in its undoing. Over the years, Infosys has operated with an unwavering focus on projects that yield high margins. This premium pricing has allowed it to maintain a higher EBITDA margin (around 30%) than any of its peers. However, this rigid pricing policy has been followed at the expense of signing new deals since clients now lay more stress on value proposition in a bid to reduce costs amid a prolonged slowdown. Still, there have been indications that the company is softening its stance on pricing.
Dipen Shah, head of PCG research, Kotak Securities, is optimistic about the company's prospects. "Infosys is showing a willingness to change, which is a positive sign. Though the macro scene is strained now, the company should clock better numbers down the road," he says. Adds Abhishek Shindadkar, analyst (IT), ICICI Direct: "The transition period is taking longer due to the tough environment. Over time, the company should revert to historical growth rates."
While investors may find current growth rates of peers like TCS and HCL Tech more attractive, these stocks have already seen a surge in their valuations. Most of the negatives around Infosys seem to be priced in.