Monday, October 27, 2008

Revisiting Infy’s Growth


I had blogged about Infy's growth and its prospects about 20 months ago here. My prediction was that Infosys will slow down, no matter what. It is the very model that Infy has used to grow that will bring down its growth – an increased reliance on low-cost solutions to customers. This strategy relies on the premise of low-cost labor markets and Infy's ability to coordinate large-scale workforce. Infy was going at about 45,000 employees and roughly a billion dollars in revenues at that point in time.

An almost linear relationship between number of employees and revenues implies that Infy has not been so successful in earning positive returns to its investments in workforce training or leveraging existing in-house knowledge to attract more business from existing clients. With a bench rate close to mid twenties, Infy has only been adding employees to gain business from new clients without being able to leverage those that are on the bench. One reason could be a slow upgrade process with respect to keeping the bench on its toes. Another could be the buffer needed to meet volatile technology trends in a business dominated by fast-paced changes in the customer environment.


Whatever the reasons, Infy has only choked itself by probably neglecting to invest in high-end services (product deployments?) that can stabilize its revenue stream without the deployment of actual work force. I have updated my analysis, and things have only gotten worse for Infy.


year        revenues    employees    income


1998        0.771        0.445        0.520

1999        0.674        0.43        2.470

2000        1.003        0.824        0.987

2001        0.314        0.092        0.604

2002        0.413        0.434        0.398

2003        0.409        0.668        0.597

2004        0.498        0.431        0.213

2005        0.351        0.432        0.460

2006        0.425        0.339        0.383

2007        0.190        0.228        0.174


The numbers under the columns represent the year on year growth as a percentage of the preceding year's number. Since 2005, Infy seems to have slowed its headcount growth, not surprising given the slower rate at which it is adding clients and also the higher wage rates in India. 2007 was particularly bad for Infy – revenues grew only at 19% and income at 17%. The sharp drop in income indicates a higher cost structure probably due to rise in wages in India. Amazingly, Infy still continues to add new employees with a headcount nearing 75000 and revenues of around 3.3 billion. Inflation adjusted, Infy has been able to earn around 35,000 USD per employee compared to 45,000 USD five years ago.

On Jnauary 19, 2007 Infy's ADR was priced at USD 56.13. As of today it is priced at 25.07 (1.05 USD in dividends over this period).

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