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Digital technologies, automation, and software platforms will be growth enablers and margin saviors.

Morningstar's Take | 13/07/2018
by Andrew Lange

Investment Thesis

Infosys is one of India’s most pre-eminent providers of IT services. However, the company has suffered from its slow-moving legacy past (smaller, more discretionary projects) and out-of-date go-to-market strategy, resulting in low revenue growth relative to peers, margin compression, leadership churn, and high employee attrition. In light of these issues, Infosys has launched a number of initiatives to improve its performance. The company has some way to go before rectifying its position, but a number of signs are promising, with revenue growth, margins, client mining, and employee attrition improving.

Infosys benefits from high switching costs, thanks to its commitment to building lasting client relationships, embedded systems and processes, and intimate knowledge of clients’ IT infrastructure. Such switching costs ensure a certain level of operational consistency, and the company’s good financial health reflects this. As a result, Infosys will look to leverage its financial stability and increase its top line while improving its competitive performance relative to peers such as Wipro and TCS.

We expect Infosys’ performance to improve moderately through a number of initiatives. To reinvigorate revenue growth, the company is pursuing larger outsourcing opportunities rather than smaller discretionary deals. Infosys plans to hire a raft of new salespeople to open more client opportunities, while offering greater differentiation in contract proposals and using greater process automation (via partnerships such as IPsoft and internally developed platforms like Infosys Automation Platform). In terms of operating margins, management has aggressively reduced costs and launched some optimization initiatives. It will also look to increase its offshore business mix and improve utilization rates. Finally, Infosys has sought to reduce its high attrition rate by giving compensation increases, issuing employees stock, restructuring salaries, and offering more promotions. Consequently, we forecast a steadier operating performance.


Infosys has highlighted issues regarding relatively low revenue growth, margin compression, leadership churn, and high employee attrition. Management has taken steps to remedy this, but it is still early and there is the risk that these problems become inflated. Poor macroeconomic conditions, management turnover, founder disruption, visa restrictions, competitive threats, and foreign exchange movements are also external risks that could generate further downside for the company. Finally, the firm must differentiate itself to avoid commodification of its services (roughly 25% of the firm’s revenue is exposed to a high degree of commodification, according to management).

Company Profile

Infosys is a global provider of consulting and IT services. The company was founded in 1981, employs more than 200,000 staff, and serves clients in over 50 countries. Infosys provides a raft of services such as management consulting, application and infrastructure management, application outsourcing, and business process outsourcing, to name a few. The firm serves more than 20 industries ranging from aerospace and defense to financial services, health care, and the public sector.

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Bulls Say

  • Infosys has many long-standing client relationships, a well-managed global delivery model, and a comprehensive services portfolio.

  • Good growth for the company’s new software and services businesses is vote of confidence for the firm’s differentiated approach to digital transformation work.

  • Continental Europe’s increasing enthusiasm for offshore outsourcing could act as a growth opportunity, and Infosys’ acquisition of consultancy Lodestone could cement a good foothold in the region.

Bears Say

  • Attrition is a concern the company needs to address. While measures have been taken to improve this metric like a recently instituted restricted stock unit (RSU) plan for upper management, more improvement is needed in order to enthuse its workforce.

  • A number of high-profile client-facing executive departures could negatively affect the firm’s standing with legacy clients.

  • Commodification of outsourcing services could significantly pressure revenue and margins (roughly 25% of the firm’s revenue is exposed to a high degree of commodification, according to management).

Other reports in TechnologySector

Company Name Date
Tata Consultancy Services Ltd 14/07/2015
Wipro, Ltd. 16/01/2015
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