Infosys: Balance is tilting towards growth from margins

The favourite indicator for Infosys watchers is, of course, the guidance. Infosys has always been conservative about it - almost always trying to outperform the number. Today, it revised its 2014 revenue guidance upwards to 9-10 percent from 6-10 percent earlier.

The higher end of guidance hasn’t changed. But it’s still important for two reasons. One, markets often guage performance based on the mid-point, and the mid-point has moved a few notches higher. Two, the lower range indicates management confidence. Besides, Q2 revenues beat estimates by analysts and the stock market responded by pushing the stock up.

Yet another indicator that Infosys watchers look at is SD Shibulal’s major theme. Shibulal tends to repeat certain words that reflect his own thinking. A few quarters back it was ‘we are running a marathon’; then it shifted to ‘cautious optimism’. This time it’s probably growth - based on his statements to the press so far. (He will be addressing a press conference later in the day).

The third indicator relates to what Infosys says about margins. Infy watchers expected the company’s margins to go up on the back of higher utilisation and a weaker currency. Utilisation, in fact, increased by 130 basis points to 73.7 percent, and the currency story is well known. However, the margins remained flat quarter on quarter, and actually declined year on year. (In part because of a $35 million provision towards visa issues, and in part because of wage hikes.)

This should also be seen in the background of the management commentary. While they continue to talk about growth plus margins, there is a subtle change. The obsession is no longer about quarter on quarter margins, but about margins over time. Which means, Infosys will be willing to let go of margins for a few quarters provided it evens out over several quarters.

While this might seem obvious for growth-oriented companies, in the case of Infosys it was a huge mindset challenge. The mindset was shaped at a time when the underlying demand momentum gave it the growth, and its obsession with margins gave it a huge premium in the stock market. When the momentum slowed, it looked as if they lost their way, and the managers were unwilling to change the policies - partly because many of them were made and championed by NR Narayana Murthy and also because those gave them huge success in the past.

Now that Murthy is back in the drivers seat, it’s easier for Infosys to change them.