Companies & Sectors
Quality of solution is the clincher for Infosys in its sales strategy, not necessarily pricing, says Nomura

Infosys is likely to lag behind its peers in the cost-efficiency segments and higher exposure to discretionary segments will continue to drag growth, says Nomura Equity Research

 
Infosys has a value design initiative, and its focus is on winning competitive deals with an emphasis on improving the quality of solution presented to clients. Solution is the clincher according to the company, not necessarily pricing. This is part of the quick note of Nomura Equity Research following a call with the company’s head of sales, Basab Pradhan. Further in going to market, the IT company has a focus on selling differentiated offerings like products and platforms and steering the conversation with clients away from plain outsourcing, observes Nomura in its quick note.
 
According to Nomura, the tasks involved in value design are qualification of which deals to chase; assembling the right team from across the organization for deal pursuit; accountability of the team (attribution of credit for contributing to non-sales people participating in this initiative); and knowledge management—i.e. drawing from past proposals, so as not to rediscover the wheel.
 
Infosys also has a star account program, where the focus is on managing star accounts or what management identifies as the 47 accounts which are $100 million plus or have the potential to reach $100 million. The 47 star accounts of Infosys contribute 60% of its revenue, narrates Nomura.
 
According to the research note, the Infosys’ sales team has 11 people looking at global markets (covering alliances, marketing and large deal outsourcing), and 16 regional heads overseeing the field force—who report to the sales head and the unit heads. In all, there are 800-900 people in sales, and pre-sales activities with responsibilities across  new account opening; account management or client servicing which has the largest allocation of resources (large accounts have five to six people manning an account); and practice sales (experts in certain domain area/pre sales)
 
Infosys says the recent sluggish growth is not necessarily due to hunting issues but more related to mining, as account-led growth has not contributed as much in the high growth areas. Infosys has been adding close to 40-50 accounts on a quarterly basis over the last four quarters, but many of those have been the non-Global 2000 clients. The company has found that clients falling below the Global 2000 have a mortality rate of about 90% by the fourth year. Hence, Infosys has refocused its hunting efforts towards the Global 2000 segment and sales bonus structures are being aligned to getting these clients.
 
The company believes there is greater flexibility currently in terms of structuring deals or taking over people. Deal pricing is largely decentralized with the unit heads taking a decision on deal go no go. The company does not believe its higher margin thresholds compared to competition is leading them to forego deals.
 
The focus on growing outsourcing, irrespective of the growth in higher value-added segments (consulting, system integration segment), continues and the company is not foregoing growth in outsourcing despite the aspiration to increase contribution of higher value-added segments in the longer term. The company continues to participate in deal churn and has been successful in the same and gave instances of two deals recently won – one in a major UK bank where they were a smaller player and have expanded footprint and another in a hi-tech company where they were the incumbent vendor and are expanding their footprint.
 
The company does not see blanket pricing reductions as seen during the global financial crisis, but believes some clients are taking advantage of the environment through rebids, wherein competitive pressures are pushing pricing down. The management says Infosys is not leaving deals on the table purely because of pricing.
 
The company’s view remains that Europe continues to be shaky and US has dependence on European demand and does not have enough momentum on its own to counter the European sluggishness. Transformational deals continue to be elusive and outsourcing deals is where the opportunity remains. From a verticals perspective, only hi-tech within manufacturing and retail is seeing good demand, while clients within the rest of manufacturing have more global businesses and are seeing slowdown/ uncertainty. The company continues to see softness in BFSI.
 
Nomura’s view on the performance of Infosys is as follows: “We continue to expect Infosys to lag peers like HCL Technologies, Tata Consultancy Services and Cognizant in the cost-efficiency segments and believe Infosys’ higher exposure to discretionary segments (about 36% of revenues) will continue to drag growth. We believe the increase in flexibility is likely to be more aimed at saving volume share, but will not necessarily drive significant incremental volumes.” 
 

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Banks’ net interest margin likely to remain under pressure, says Kotak Institutional Equities report

Retail deposit rates are likely to be a bit stickier compared to the earlier cycle, says a Kotak Institutional Equities report

 
There is a steady decline in market deposits (CD). Cuts in wholesale deposit rates on the back of improving liquidity conditions should benefit select wholesale banks. But NIM (net interest margin) would remain under pressure as pricing power shifts to borrowers. These are the observations made in a Kotak Institutional Equities report.
 
Retail deposit rates are likely to be a bit stickier compared to the earlier cycle as interest rates are unlikely to come down sharply. Further, RBI (Reserve Bank of India) has directed banks to have a sound policy on differential rates. The government has asked banks to reduce their dependence on bulk deposits. These arguments have been made in the Kotak report.
 
The Kotak report notes that most banks have started to reduce their wholesale deposit rates with liquidity conditions turning comfortable in recent weeks. Incremental CD ratio (since 6 April 2012) is at 16%, as credit demand is currently in a slack period, while growth in deposits has been strong. There has also been the positive impact from the recent cut in SLR (statutory liquidity ratio) of 1%. Select banks are still offering bulk deposits at a marginal premium over retail term deposits. On the other hand, the government has been insisting on banks to reduce the share of bulk deposits in the overall deposits.
 
For the banks, the deposit profile has significantly changed (primarily from urban markets, non-individual in nature who are interest-rate sensitive with high degree of awareness of alternate instruments) making it a challenging exercise to mobilize/ retain them. Banks are yet to cut retail term deposit rates materially despite the three month CD currently at 8.4% (10.7% in March 2012 and 9.1% in June 2012). These observations in the banking sector are also made by the Kotak report.
 
Kotak’s analysts believe that the decline in wholesale rates is likely to benefit Andhra Bank, Central Bank, Corporation Bank, IOB, OBC, UCO and Vijaya Bank, among public banks, and Yes Bank and IndusInd Bank among private banks. High CASA ratio banks like SBI and HDFC Bank are unlikely to be benefitted in the current phase.
 
NIM is likely to remain under pressure; and Basel-III guidelines and provisions can act as a floor, according to the analysts. The report states that  NIM is likely to remain under pressure in FY13-14E as revenue growth is expected to slow down (13% CAGR) on the back of slower demand for credit (14% CAGR) and NIM compression (about 20 bps) as pricing power shifts to borrowers. Lending spreads, especially for public banks, are at a near-term high (4% as of FY12). Kotak expects a compression of about 40 bps, going forward in FY12-14E. Private banks are likely to report stable performance as NIM is likely to improve for ICICI Bank and mid-tier private banks like Yes Bank and IndusInd Bank.
 
However, the Kotak report doesn’t expect NIM to compress sharply (similar to FY09-10) for two reasons: (1) Basel-III guidelines require banks to shore up core equity which would require higher internal generation of capital, and (2) overall provisioning environment will remain at elevated levels as banks make higher provisions for fresh slippages. Indian banks make about 70% of their overall revenues from NII (Net Interest Income), as contribution from fee business and treasury income is unlikely to change materially.
 

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