Future of Infosys/TCS/Wipro
Posted: Sat Jul 14, 2007 5:50 pm
One of my friends forwarded this link to me. I have posted articles here. http://shrikant.emergic.org/
Infosys gets Desperate
I have previously written on my blog about the Infosys bubble. Last week there was a rumor that Infosys may bid for Cap Gemini a French services company. This act is nothing but an act of desperation based on exactly what I had predicted. I love blogs because they document lose talk.
Why is Infosys getting desperate? high expectations from the market. For a company with revenue of approximately 3.X billion, profits 1.3 billion and a market cap of 27 billion. Compare with Cap Gemini?s revenue 10.X billion, profits 400 million and a market cap approximately equal to revenue. Cap Gemini has a strong presence of 12,000 employees in India, many of them in Mumbai, where Infosys has minimal presence.
So what does Infosys get from this deal. Mainly revenue to maintain growth from Cap Gemini customers, convert the high Euro salaries to Rupee and Dollar salaries. At the same time, the Indian environment is catching up fast, rising salaries, ability to continuously add quality manpower, lousy Indian infrastructure that takes a toll on the quality of living and life of Infosys employees. The politicians in India are trying to figure out how to make money from the next land deal rather provide world class infrastructure to the tax paying employees.
I had a chance to visit the Infosys campus in Pune last week. The facilities are five star, but all these add to the cost of doing business. The lower salaries also make the Indian employee unproductive, productivity improvement has not kept pace with rising salaries, customers are not paying more, and dollar seems to be getting weaker.
For those who have had a nice Infosys ride, it time to sit back and think. Infosys is just an example, but the story remains the same for TCS, Wipro, and Satyam etc. Those that believe the IT boom is forever, revisit it.
The Infosys Bubble
Everybody was excited at the bonus issue and revenue results from Infosys, currently celebrating their silver jubilee. I do not agree with this herd, prescribe ?cautious optimism? moving forward for the challenges outweigh the opportunities moving forward. The story continues to get bleaker, for the whole software services industry as a well, where just adding bodies to get incremental revenue and no differentiation, is the strategy of the day, as TCS, Wipro and Infosys market their services to the world. Lets review some facts.
Infosys needed 52,000 employees to generate revenue of approximately US$2 Billion that averages to US$40,000 per employee. Assuming perfect linearity, they will need another 25,000 employees to add the next billion. In comparison NVIDIA a producer of graphic chips has a revenue of 2.38 Billion with 3,000 employees. Another data point, Intel does US$36 Billion with about 100,000 employess. So the maximum Infosys can generate with 100,000 employees is US$4 Billion.
Infosys, 5 years back, along with other Indian software majors, had a huge advantage against IBM Global Service, Accenture because they had a minimal India presence. This allowed Infosys, to compete more effectively on the dollar arbitrage. Since then, all have beefed up their India presence, IBM now has 40,000 employees and overtake Infosys very shortly. Accenture now has 16,000 employees in India. So premium billing, to raise the upward revenue per employee is a tough task, as Accenture and IBM have competitive billing rates with their Indian presence and better global consulting brands. There will be additional pressure, to retain the best employees employees and maintain healthy margins. Some MNCs are taking presence via acquisitions, EDS in one stroke, has bought a India presence, with a majority stake in Mphasis-BFL.
Also Infosys gets a major break with no corporate taxes on profits. Its matter of time when IBM and Accenture will put pressure on WTO to fix this issue. As a tax payer, this is a big drain to the national exchequer and weaker global competitors.
My dear friends, think a bit, pretty easy to conclude that Infosys has tough times ahead. A model where you add more bodies to add incremental revenue, should not excite anyone. Does Infosys deserve a PE of 35 and market cap of 10X sales. Lets paint a scenario, Infosys doubles their revenue in the next 4 years. What should their price be ? assign a PE of 12, assume no corporate taxes, no change in revenue per employee, more people to manage. Have a great silver jubilee, Infosys, because looking forward, it does not look too exciting. Let me end with a quote by Oscaar Wilde, ?Everything popular is wrong
Infosys gets Desperate
I have previously written on my blog about the Infosys bubble. Last week there was a rumor that Infosys may bid for Cap Gemini a French services company. This act is nothing but an act of desperation based on exactly what I had predicted. I love blogs because they document lose talk.
Why is Infosys getting desperate? high expectations from the market. For a company with revenue of approximately 3.X billion, profits 1.3 billion and a market cap of 27 billion. Compare with Cap Gemini?s revenue 10.X billion, profits 400 million and a market cap approximately equal to revenue. Cap Gemini has a strong presence of 12,000 employees in India, many of them in Mumbai, where Infosys has minimal presence.
So what does Infosys get from this deal. Mainly revenue to maintain growth from Cap Gemini customers, convert the high Euro salaries to Rupee and Dollar salaries. At the same time, the Indian environment is catching up fast, rising salaries, ability to continuously add quality manpower, lousy Indian infrastructure that takes a toll on the quality of living and life of Infosys employees. The politicians in India are trying to figure out how to make money from the next land deal rather provide world class infrastructure to the tax paying employees.
I had a chance to visit the Infosys campus in Pune last week. The facilities are five star, but all these add to the cost of doing business. The lower salaries also make the Indian employee unproductive, productivity improvement has not kept pace with rising salaries, customers are not paying more, and dollar seems to be getting weaker.
For those who have had a nice Infosys ride, it time to sit back and think. Infosys is just an example, but the story remains the same for TCS, Wipro, and Satyam etc. Those that believe the IT boom is forever, revisit it.
The Infosys Bubble
Everybody was excited at the bonus issue and revenue results from Infosys, currently celebrating their silver jubilee. I do not agree with this herd, prescribe ?cautious optimism? moving forward for the challenges outweigh the opportunities moving forward. The story continues to get bleaker, for the whole software services industry as a well, where just adding bodies to get incremental revenue and no differentiation, is the strategy of the day, as TCS, Wipro and Infosys market their services to the world. Lets review some facts.
Infosys needed 52,000 employees to generate revenue of approximately US$2 Billion that averages to US$40,000 per employee. Assuming perfect linearity, they will need another 25,000 employees to add the next billion. In comparison NVIDIA a producer of graphic chips has a revenue of 2.38 Billion with 3,000 employees. Another data point, Intel does US$36 Billion with about 100,000 employess. So the maximum Infosys can generate with 100,000 employees is US$4 Billion.
Infosys, 5 years back, along with other Indian software majors, had a huge advantage against IBM Global Service, Accenture because they had a minimal India presence. This allowed Infosys, to compete more effectively on the dollar arbitrage. Since then, all have beefed up their India presence, IBM now has 40,000 employees and overtake Infosys very shortly. Accenture now has 16,000 employees in India. So premium billing, to raise the upward revenue per employee is a tough task, as Accenture and IBM have competitive billing rates with their Indian presence and better global consulting brands. There will be additional pressure, to retain the best employees employees and maintain healthy margins. Some MNCs are taking presence via acquisitions, EDS in one stroke, has bought a India presence, with a majority stake in Mphasis-BFL.
Also Infosys gets a major break with no corporate taxes on profits. Its matter of time when IBM and Accenture will put pressure on WTO to fix this issue. As a tax payer, this is a big drain to the national exchequer and weaker global competitors.
My dear friends, think a bit, pretty easy to conclude that Infosys has tough times ahead. A model where you add more bodies to add incremental revenue, should not excite anyone. Does Infosys deserve a PE of 35 and market cap of 10X sales. Lets paint a scenario, Infosys doubles their revenue in the next 4 years. What should their price be ? assign a PE of 12, assume no corporate taxes, no change in revenue per employee, more people to manage. Have a great silver jubilee, Infosys, because looking forward, it does not look too exciting. Let me end with a quote by Oscaar Wilde, ?Everything popular is wrong