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 a 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”.

17 thoughts on “The Infosys Bubble”

  1. hi Shrikant,

    I am not entirely clear on why your comparing Infosys’ growth to NVidia and Intel. I think your implying that adding bodies is only linear? But I am not sure how that conclusion was reached through comparision.

    To play devils advocate, can it really be only linear? One way to tell would be to analyze the growth of the company in terms of the number of employees against its revenue over the past 10 years?

    Anyhow, it seems the founders (and even the media) are irrationally bullish about the future. I agree that Infosys could eventually turn out to be a weaker global competitor.

    – Santosh

  2. What I am imlying is that just by adding bodies, it becomes more difficult to maintain linearity. You have to increase the revenue per employee to maintain decent linearity, from a small base the linearity curve can be maintained just by adding bodies. The most difficult thing in this world is to manage people. Also the stock increase nullifies the discontent brewing amongst employees. Also if you look at the sales pitches of Infosys, TCS, Satyam it is hard to find any differentiation. For real consulting anyone, including Indian firms would prefer Accenture or Global Services or Mckinsey at the very high end.

  3. Hi Shrikant,

    Relevant points. However the comparison could have been with other IT service players to make it more realistic. Otherwise it can be looked at as a comparison of IT services with product companies that have different business models. My views:

    1. The IT apps development, infrastructure management type work (that have zero revenue impact to client organisations) will become a pure commodity. Any country/company that has least cost structure, not necessarily through dollar arbitrage alone, will be the leader here.

    2. Indian IT services cos. need to move to revenue impacting work e.g. developing the platform for eBay, doing software product development for ISV’s etc. This requires a different set of skills, mindset of people, client engagement, and management style. Only then can you improve the revenue/person.

    3. IT Consulting organizations like Cambridge Tech Partners (now part of Novell), Sapient had/have much better revenue/person numbers. CTP did around $620 million with 4500 odd people (this was in 1999, its peak). Again here the work done was close to revenue impacting (at least a significant part of the revenue stream).

    Looking through the financial numbers, and the investments being made in increased training capability, one can only say that Infosys seems to be doing a good job of managing costs, even while scaling to larger numbers.


  4. Agree. Infy/Wipro, after amassing such wealth in experience, people and money are in a good (?) position to have product development units. They could identify small workgroups and incubate within the organization for the same.
    Regarding 25k for 1B of revenues, some smart HR may come around to find better working methods to tweak those numbers. Now it’s more of an HR challenge to manage such a huge herd, because if the numbers are there, I guess work will keep flowing…

  5. Hi Shrikant,
    Indeed the the Infosys bubble is likely to burst in the next few years. However good their processes, they are recuriting ‘top-talent’ form engineering colleges that train them to pass campus recuriting like they train them to pass the university exams.
    There is not even a discourse happenning like what Robert Scoble is doing to set the agenda for even mighty Microsoft( my rants on this here )
    We need more wakeup call like yours and more action on them too.
    -Balaji S.

  6. Hi Shrikant,

    Agree with you…feel Infosys,TCS etc will go the CSC way in the US…. 1 Lakh plus employees doing application support.

    An interesting angle to this will be on salaries…if TCS,Wipro etc stagnate ,I wonder what will happen to the salaries in the IT sector…it will certainly stop growing at 15% …seems like a repeat of 2000 is around the corner.

    As regards why these companies are not into products/high-end consulting etc,anyone who has worked in Indian IT majors(I used to be one of them),know that there is a cultural mismatch…employees working on products don’t want to work on them in India…instead they want to go overseas on some project assignment.

    This explains why some of the finest Indian IT products (Tally,MCX etc) have been built by non-IT majors.


  7. “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 ”

    I recommend using the WACC model to calculate the price of Infosys and you can see a healthy picture.
    It is more accurate because it is based on cash flow and risk.
    REVENUE, NET PROFIT, CASH FLOW projected over the 4 years will provide the answer provided you take the right parameters on WACC etc.

  8. I happened to listen to an interview by our good friend Mr. Pranoy Roy – with both Mr. NRMurthy and Mr. Bill Gates. To a question “what do you worry about when you go to bed” this is what MR. NRM had to say “Scaling up”. Obviously, he meant scaling up of his, i mean, office infrastructure. Mr. Bill had this to say “Write good software”.

    With the shortage of qualified engineers which Mr. Mohandas Pai keeps repeating in the press, and an average second rung leadership at Infosys, i strongly feel, and overdependence on low cost arbitrage, dependence on low exchange rate (remember free float is around the corner) there are going to be hiccups.

  9. What ever the case , Infy, TCS are now, they have given large employment base for graduates and they have boost the lives of indians interms of individual growth.

    But, They may not challenge Global Players IBM, Accenture , EDS etc.. interms of Total Revenues, But their startegy will be finally usefull for us as MNC’s started emplying more indians thus make Indians growth interms of higher wages etc..

    But Indian Players will give more competetion and the growth will be slow , but they will sustain for atleast 10 more years what ever may be scenario is.


  10. Hi Shrikant,

    My name is Ritika and I wanted to know a little about Infosys Bubble… Can you help me with some information?

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