The Bellwether and the Unholy Rush

The chinks in Infosys' armor have begun to show. The company that has been the bellwether of Indian IT disappointed many with its recent annual results and outlook. The disenchantment was sudden and its peers like TCS and HCL Technologies reporting performance more endearing compounded it. These companies also gave better outlook on the market compared to Infosys. The company that was once considered infallible suffered a fall from grace.

However, unlike the Indian press that jumped to pummel Infosys and its management, my analyst friends in the US did not read much into it. The overall deal activity in JFM quarter had cooled down. Some indicators about JFM quarter from TPI:

• The 184 contract awards (counting contracts that are $25 mn upwards) during the first quarter represented a drop of 31% y-o-y and 18% sequentially.
• ITO contract values fell 20% y-o-y and 37% sequentially. In BPO, contract values dropped 27% y-o-y and 30% sequentially.
• Four out of five contracts were restructured and not of new scope.

Of course, apart from the market environment, individual company performance depends on a whole host of factors that include diversity in services portfolio, existing relationships, sector-specific strengths, utilization rates, hiring policies, SG&A expenses during the period, and even forex-related maneuvers and many other. These situational factors can influence a company's performance in a quarter.

Part of the blame falls on Infosys itself for having played the role of the industry's bellwether and setting expectations thereof. Now is the time to get the other end of the stick. Sure, Infosys has been grappling with some issues in the past few quarters. I would call these issues transitory, but it does call for stepping up on the gas. In this industry, showing revenue growth may be the easier part; preserving the strategic direction is the tougher act. Investors and analysts should give credence to Shibulal's statement about Infosys' long-term growth plan.

What followed Infosys' announcement of no pay hikes this year was even more clamorous. When one of the online sites from our publishing group carried the news, it led to a barrage of comments from employees who ranted as if they have been severely shortchanged. Rumors about Infoscions resumes flooding jobsites made the rounds. The ingrate employees who have it so easy in their life to work for global clients and claim to possess world-class skills should be thankful that they are employed by companies like Infosys who continue to invest in them. They fail to understand that Infosys is a business, withholding pay hikes is a business measure, and that the company has the rightful choice to exercise this option when required.

The episode exposes the dark underbelly of this industry; this is not Infosys' story alone. This is not the war for talent; it is the unholy rush for a few more bucks. It is a sign of immaturity of the industry and the fickleness of the minds of people who work in it. This will continue as long as growth is measured in terms of number of people recruited. For whatever reasons, have you ever heard of an Accenture or IBM announce recruitment plans or pay hikes? All the talks about non-linear growth strategies by Indian companies seem to be pure aspiration if hiring numbers continue to be the yardstick of growth.

Even as I finish writing this note, I get an alert that S&P Ratings Services has revised the rating outlook on TCS, Wipro, and Infosys from stable to negative. Not only that, S&P also revised the outlook on India's long-term sovereign rating to negative. Wish we had some other country to go to!