Shed that margin fixation

Stung by the sharp rise of rupee against dollar, Infosys Technologies Ltd for the first time ever reduced its profit and revenue outlook for the fiscal 2008. But, the company raised its dollar-term guidance marginally for the year.

Infosys expects its earnings per share (EPS) to rise as much as 14 per cent to Rs. 79 for year-ended March, 2008 compared with the earlier estimate of Rs. 80.29. Revenues are expected to rise as much as 18 per cent to Rs 164.33 bn, as against the earlier forecast of Rs.170.38 bn. [1$=Rs.40.50] On a sequential basis, Infosys’ net profits saw a negative growth of 5.7 per cent, while its revenues were flat.

“Business parameters have been strong if you look at the growth both in revenues and volumes,” said Mr. S. Gopalakrishnan, CEO, adding “the impact due to rupee rise was beyond my control”.

Yet behind this show of supreme confidence lurks deep unease. A confluence of adversities is at play. Besides an appreciating rupee, a severe shortage of qualified talent at home, and a cap on H-1B worker visas to the U.S., along with pre-2008 election protectionism threats. Add to that the end of certain tax benefits and the growing success of multinational competitors such as Accenture and IBM on Indian turf. Perhaps most challenging for the Indian players is the pressing need to move up the ladder into business consulting, a domain that companies such as IBM have dominated for decades. Indian outsourcing firms need to invest heavily to secure a position in this arena, and that will erode their fat profits, at least in the short term.

Gartner estimates over the next two years, Indian companies in the private and state sector, from banks to the railways, are expected to spend an estimated $5 billion on new technology, all of which will need to be serviced. Save for Tata Consultancy, 9% of whose business is domestic, the Indian players have largely focused on exports and missed the big opportunity in their own backyard.

The future lies in doing things the multinational way: embracing innovation, consulting, and geographical expansion. To get there, Indian companies must get over their 25% margin fixation. Those continuing high margins mean they are probably under-investing for the future.

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