...Shibulal, do your own thing...

No sooner Infosys announced its Q4 2011-12 results with a lower guidance, than the market pundits started pummeling it for hoarding up all its cash and not going in for acquiring businesses. I am tempted to ask - What else will they do...?

The problem with stock market / industry analysts is that the so-called free strategic advisory they proffer is nothing but a leaf out of the consultants' manual that is the thinnest ever tome with a two-size-fit-all strategy. First, if they are hired by a diversified firm, the consultants would advise them to merge/consolidate/ integrate. And if the hirer is a single vertical behemoth, they'll say Break-it-down. With just this two options, they get a life, ruining the clients' own. If you guys know a third strategy a consultant has, feel free to write in.

Now they see Infy sitting with a cash pile of Rs.20,500 crore (Roughly $ 4 billion) and they are urging it to acquire businesses. Why wouldn't they ever concede that if a company management was smart enough to pile all that cash up, wouldn't it know when and where to deploy it...? We all know the major acquisitive frenzy unleashed by Wipro with its string-of-pearls strategy got it - to the 4th or 5th place in the pecking order from its 3rd place after TCS and Infy. Like a good hunter, Infosys should wait for a right synergistic acquisition that falls in line with its future growth projections. Sitting on a cash pile is any day better than soaking it up into a bad big-bang deal and going down with it. Infosys CEO S.D.Shibulal is a veteran and I think the decision is better left to him. I am sure Infosys will get its act together, in time...

Now join the chorus

Just as we thought the sub-prime mortgage woes have abated in the U.S, the after shocks begin.

Going by the news from the Wall Street, two credit-rating agencies stripped away the fragile masks of shaky mortgage securities held by Hedge Funds, exposing their worthless sides. Alarms also were sounded yesterday for the nation's banks when the Federal Deposit Insurance Corp. is looking "very carefully" at how many banks are holding junk mortgage paper, particularly a tainted and repackaged version of the risky junk bonds, known as collateralized debt obligations (CDOs.)

An estimated $1 trillion of CDOs are said to be held by over leveraged funds that could be the first to crack. Ripple effect is sure to be felt across the global economy thanks to the flatness of the financial world.

Infosys Q1-08 results unmasked the first roadkill of a surging rupee. With the stream of bad news that we keep hearing from the U.S, the scope for near-term recovery of the dollar is getting remote.

You chose a flat world…. Now join the chorus – “God bless America !”

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Infosys-Capgemini...did we get it right?

Read it recently. But why Capgemini? The next sound I heard was the bam bam bam of my head banging against the wall.

May be the mongers got it wrong. The space getting too crowded, Rupee appreciation that shows no sign of relenting, Visa woes, wage inflation and attrition getting out of hand - for Infosys, there never was a better time for a sellout. Organic scale up plans and revenue growth would depend on faster recruitment of skilled engineers that is in severe short supply. May be an Accenture, IBM, EDS or even CG bid for Infosys makes a better sense…

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Infosys management has been assiduous all along and I trust them for their deliberative approach. They wouldn’t load up debt in their balance sheet for acquiring a CG that it cannot discipline. CG is way too big, imbibed a lot of bad habits and is diverse in culture. Founders using the revolving door, rumors of a senseless acquisition….it looks like a dry run to me before a more dramatic something at Infosys…?

Shall we call it a sellout dance…?

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A tale of two business models

Born less than decade ago, Google Inc. (NASDAQ: GOOG and LSE: GGEA) now reigns as the most profitable—and probably most powerful—force on the Web. As usual, Google's financial firepower flowed from its search engine. That ubiquitous tool has become the hub of the Internet's largest marketing network and appears to be getting even better at identifying the right ads to display with its search results, which in turn helps elicit more revenue-generating clicks

Google 1st Quarter 2007 results snapshot

Revenues - $ 3.66 b
Net Income - $ 1.0 b
EPS - $ 3.18 per share

No. of employees – 12,238 nos.
End quarter cash balance - $ 11.9 b
Quarterly revenue productivity per employee - $ 299,068

Date of Incorporation : Sept. 7, 1998
IPO : August 19, 2004
[19,605,052 shares were offered at a price of $85 per share ]
CMP of stock - $ 482 [ P/E – 35 ]
Market cap - $ 152 b

Did you say scale ?

What stands out or boggles my mind in more ways than one is the amazing power of an ingenuous yet easily scalable business model that Google espoused. Being less manpower intensive (just 12,238 employees now) and more equipment / server capacity centric, it is least affected by the ubiquitous problem afflicting the IT industry – one of employee attrition.

Pitched against the business model of Indian IT bellwether Infosys Technologies Limited (NASDAQ: INFY) which recently celebrated its 25th anniversary, the contrast is glaring. While it can’t be compared strictly because of inherent diversities, the power of robust business models that enable rapid scaling and by that, shaping the very fortunes of businesses is evident here.

Infosys 4th Quarter 2007 results snapshot

Revenues - $ 898 mm
Net Income - $ 272 mm
EPS - $ 0.48 per share

No. of employees – 72,241 nos. (incl. that at subsidiaries)
Quarterly revenue productivity per employee - $ 12,430

Date of Incorporation : July 2, 1981
IPO : February 1993
[1,378,947 shares were offered at a price of $2.26 per share ]
CMP of stock - $ 42 [ P/E – 22 ]
Market cap - $ 30 b

Here’s where the significance of the business model hits home. While it took 23 years for Infosys (with its strength of 72,241 employees) to notch up a billion dollars in revenues, Google’s business model helped it achieve $ 1.46 b in 2003, in just 5 years of its incorporation and one year before its IPO – with just 1/6th of that strength.

Throw in a few other companies like TCS, Wipro, Satyam, HCL Tech and not wanting to be outhired, MNCs like IBM and Accenture too open shop locally and adopt massive ramp up from the limited pool of qualified engineers, you create a mecca for job hoppers. They are all in the same turf just to stay competent. Hiring becomes a non-process as anyone who can spell binary is recruited diluting the quality of the hire. Skill gaps are hurriedly addressed by on-the-job training if not on induction itself. If the hires are not on a project, it hits their bottomlines hard. Billability becomes the watchword instead of quality.

This lacuna is being realized now and precisely the reason why Infosys top brass is tempted to rethink the viability of its business model. Related news item is here and my earlier insights here and here.

What do you make of it ?

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[PS – I must also place on record the fact that the indian companies mentioned above took birth in the third world aiming to work for the first world. These companies started operations with severe handicaps when Indian businesses were reeling under the yoke of licence raj, a period between 1947-90 when the state policy was riddled with red tape, hostile to businesses, with severe import restrictions even for high end technology. Exports were severely restricted too.

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Despite the ongoing reforms, India still ranks in the bottom quartile of developing nations in terms of the ease of doing business; and the average time taken to incorporate a company or to invoke bankruptcy is much greater.

Google by contrast took birth in the capitalist mecca - USA, and measured by that yardstick, it took off with an inherent advantage.

My purpose here is to bring out the criticality of business and revenue model in shaping the fortunes of businesses alone and not to denigrate the shining Indian star corporates mentioned above.]

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