Listen up, Infosys! CLSA has three burning questions for you

Infosys’ results were, no doubt, a shock to investors. More shocking was its dollar revenue estimates, which it projected would grow by a mere 8-10 percent, lower than industry body Nasscom’s estimate of 11-14 percent.

Even in the current quarter, the technology bellwether maintained that it would manage growth of barely 0-1 percent. That means it is counting on the remaining three quarters to fetch it 8-10 percent growth. No wonder the stock has plummeted 17 percent since 13 April, the date it announced the results.

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In response to the poor results and outlook, an analyst with CLSA, Nimish Joshi, has written an open letter to Infosys’ CEO, SD Shibulal, which aptly sums up investors’ concerns at this point of time.

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1. **What is Infosys doing to correct the loss of revenue and falling share of operating profit compared with peers?**Infosys has always been harping on maintaining its margins, or profitability, on its contracts. That has caused it to lose deals that have lower margins and, subsequently, market share compared with peers like TCS, HCL Tech and Wipro.

The share of Infosys in the entire industry’s earnings before interest and tax is also declining, and that,according to Joshi, is a bigger concern. He writes: “History is replete with multiple examples where loss of market share impaired pricing power over time and ultimately led to convergence of cost-structures and margins across companies.” In other words, there could be decline in shareholder value over time.

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2. Is Infosys’ extraordinary ability to predict its own business and manage industry-best operations declining? Forget the8-10 percent growth estimate for the current year, most investors are starting to worry about Infosys’s inability to stick to previous targets. For instance, the company missed even its lowered growth estimates for the past financial year.

Joshi says, “Infosys’ practice to give a financial outlook is driven by your (Shibulal’s) desire to have symmetry of information between shareholders, employees and management and has been one of the cornerstones of Infosys’ hallowed status.” But Infosys has not matched its own estimates in the past 18-24 months. That inability could lead to a loss of shareholder confidence in Infosys’ ability to predict its future performance. That could cause a drop in the price-earnings multiple, a measure of a share’s valuations, that investors assign to Infosys’ shares.

3. Isn’t it necessary for a cash-rich company like Infosys to articulate a clear policy for cash usage? The third issue deals with Infosys’ inability to deal with its huge treasure chest of cash.

The company has a cash balance of $4.1 billion (about Rs 20,000 crore), which has multiplied 12 times in the past nine years, according to CLSA. The company’s business model is neither capex nor working capital heavy. Joshi points out that given Infosys’growing scale and emphasis on developing capabilities organically make a large acquisition unlikely.

So, it either needs to dole out cash to shareholders in the form of dividends or find other ways to make effective use of its money.