Why Infosys Q4 results are a major disaster

First Post :Sunainaa Chadha Apr 12, 2013

IT major Infosys today disappointed investors with its subdued revenue growth outlook despite posting a 3.3 percent increase in its consolidated net profit to Rs 2,394 crore for the fourth quarter ended March 31, 2013.

Revenue Guidance miss: For 2012-13, Infosys revenues grew 5.8 percent against a forecast of 6.5 percent growth. Infosys CEO SD Shibul said the miss was on account of slower deal ramp-ups, pricing decline and adverse cross-currency impact.

The company said it expected 2013/14 revenue to grow 6-10 percent, lower than market expectations of a 12 percent guidance, and added that global economic uncertainties remain challenging for the industry. The guidance is particularly bad considering the IT body Nasscom’s projection of 12-14 percent growth for the sector. Also considering that Infosys’ guidance includes contribution from Lodestone, the Zurich-based management consultancy firm it acquired in Sept 2012, this is a huge disappointment. If one excludes Lodestone, forecast will be even lower.

Further, the lower-than-expected FY14 guidance reflects the uncertain macro environment and the pricing pressure which the company is experiencing.

“Infosys is experiencing delays in decision making by clients and also delays in ramp-ups. The lack of stronger revenue growth despite the pressure on realisations which the company is facing in the non-discretionary space, is concerning. We expect the stock to remain under pressure,” said  Dipen Shah, Head of PCG Research, Kotak Securities.

Reuters

“Infosys results are a disaster. FY14 revenue guidance 6-10% growth, shame they didn’t do away with this. I reckon a large part of the adjustment has already happened today itself,” CLSA said in a note.

K.K. Mital, CEO for portfolio management services at Globe Capital, was quoted by Reuters as saying that Infosys’ guidance appears to be a company-specific problem. “Even mid-cap companies are expected to perform better than this.”

NO EPS guidance

Secondly, speculation that Infosys might do away with guidance may not have been completely off the mark, as the company has not given any earnings guidance. This may imply that  the company does not yet have a firm handle on its margin trajectory.

“The company has not even given EPS guidance for the year, and has continued with not giving out quarterly guidance, something it started in 2QFY13. Thus, quality of guidance and extent of “information asymmetry” that the company seeks to address when giving out guidance, has clearly worsened,” brokerage Nirmal Bang said in a report.

According to brokerage JP Morgan, Infosys has disappointed on all counts and the dismal quarter has again raised the question whether Infosys’ turnaround story is credible or not.

“Infosys disappointed on all counts —USD revenue growth, operating margins missing, FY14 revenue growth guidance and withdrawal of EPS guidance”, it said in a note today.

Organic growth guidance missed:

Infosys also missed its organic growth guidance of 5 percent for FY13, as revenues for the full year came in only at 4.2 percent, which excluded its Lodestone buy.  Brokerage IDFC said most of the incremental growth was driven by Lodestone, the Swiss consultancy which Infosys acquired last year.

Consolidated revenues in dollar terms increased to $1938 million, up 1.41 percent, from $1911 million quarter on quarter, including the Lodestone buy. JP Morgan expects Lodestone to contribute 1.3% points to Q/Q growth; which implies Infosys’  revenues must have hardly grown on an organic basis.

Operating margins disappoint too

Even the companies’ operating margins, a key measure of profitability, fell more than estimated at 23.55 percent despite modest increase in utilization, which might imply that pricing cuts might be deeper than expected.

“The operating margin of the company declined by 210bp qoq to 23.6%, which is a historically low level for Infosys. Profit was held up and because of higher other income of Rs 674cr as againstRs 503cr in 3QFY2013. This seems that the company is still not out of woods,” said Ankita Somani, analyst at Angel Broking.

Are the staff leaving the ship?

During the quarter, Infosys added 8,990 (gross) and 1,059 (net) employees taking the total headcount to 1,56,688.

From about 17 percent at the end of December quarter, employee attrition has moved up to 20 percent in the March quarter , where as in the rest of the industry attrition has been stagnant or falling.

“Notably, it is the highest quarterly annualized attrition for Q4 in the ast decade. Though, partially the pick-up might be because of the company-specific issues, it probably also points to increased demand for resources from other well-performing companies,” said JP Morgan.

Even the management commentary remained cautious, despite industry outlook improving. In an analyst call, Infosys CFO  Rajiv Bansal reiterated that “As we go into Q4, challenges remain.”

The management commentary from industry peers will be important to determine whether the pressure faced by Infosys is company-specific or an industry-wide phenomenon.

The only silver lining seems to be the overall recovery in the US and stabilisation in Europe expected in the second half of this year which may help Indian IT as a whole.

Naked truths about banking

B S :A Seshan  April 10, 2013 Last Updated at 21:25 IST

Anat Admati and Martin Hellwig contradict established myths that bankers spread about global banking

There are known unknowns; that is to say there are things that we now know that we don't know. 

But there are also unknown unknowns; 

are things we do not know we don't know."

- Donald Rumsfeld,
former US Defence Secretary

Whenever bankers objected to raising the capital of their institutions under the Basel norms on the ground that it was costly, I used to wonder why this should be the case. 

Does equity not form part of working capital deployed in their businesses? If so, how is equity, as such, costly vis-a-vis borrowing through deposits and other means? The book under review comprehensively deals with such myths in the world of banking, which the authors call "the bankers' new clothes". 

It consists of three parts: "Borrowing, Banking and Risk", "The Case for More Bank Equity" and "Moving Forward". There are 13 chapters, with 108 pages of copious notes at the end that are as informative as the main text.

The authors explode a number of myths spread by bankers. For reasons of space, only some of the more important myths and the responses are listed. (1) Banks are so different from all other businesses that the basic principles of economics and finance do not apply to them - on the other hand, the principles are the same. (2) Tighter restrictions on banks' borrowing might increase bank safety, but it would come at the expense of growth. This is not necessarily so. (3) Banks must "set aside" capital to satisfy new regulations - a variation of the "capital-is-costly theme" mentioned at the beginning. This is due to confusing capital with the cash reserve that does not earn a return. (4) The ability of banks to hold their own against global competition might suffer if regulation were stricter for them than for banks in other countries ("the level playing" argument). This ignores risk-taking. (5) Large banks are too big to fail, disrupting the economy - hence the need to be rescued by the government. The cost of saving banks may be even greater. (6) The financial crisis of 2007-09 was primarily caused by the problem of liquidity and not insolvency, since financial institutions did not have access to markets. It arose because the latter diagnosed it correctly as insolvency. (7) Media reports give the impression that the risk in lending comes mainly from speculation gone wrong.

 When banks suffer huge losses from systematic mistakes in lending decisions or the maturity mismatch between their assets and liabilities, it does not make news. (8) Derivatives and new techniques for risk management have benefited society by providing better means of sharing risks.

 They have, however, also expanded the scope for gambling and can be used in unrecognisable ways that increase, rather than decrease, risks in the system. Donald Rumsfeld's remark cited at the beginning makes the point clear.

 The authors point out that trading in financial claims is more important for many banks than loans in their balance sheets.

The theme of the book is that banks have assumed excessive risks on the grounds of the myths listed above with considerable cost to the economic system and taxpayers. 

The authors caution the reader that today's banking system, even with the proposed reforms, is as dangerous and fragile as the one that brought us to the recent crisis. They recommend a number of reforms. The emphasis is on increasing the equity requirements of banks. They are dissatisfied with Basel III norms.

One major criticism of an otherwise eminently readable book is that there is no reference to the interface between bank regulation and monetary policy, though there are sporadic references to the US Fed's role in the financial crisis.

 When I looked at the index, I was surprised that there was only one entry - and that too related to a note at the end of the book. Yet one of the cardinal lessons of the recent crisis is the close link between monetary policy, banking practices and financial stability that has led to special monitoring arrangements in many countries. 

At the time the US was discussing the framework of its financial architecture, Thomas Jefferson, third US president, famously said bankers were more dangerous than standing armies in the field because of the financial clout they commanded. His observation is still relevant. 

The easy money policy followed by the Fed in the earlier years was much praised at that time for the prosperity it brought to the US economy. It is now considered the villain of the piece because of the adverse selection of loan proposals and subprime mortgages that it spawned, sowing the seeds of the crisis. One past study of the European Central Bank showed how the capital-asset ratio had a restraining influence on the growth of money supply in the euro system.

The authors have written the book for the enlightenment of the average reader who has no background in economics, finance or quantitative fields. But it can be read by anyone interested in banking - bankers, policy makers and researchers.

---

THE BANKERS' NEW CLOTHES
What's Wrong with Banking and What to do About it
Anat Admati and Martin Hellwig
Princeton University Press
398 pages; $29.95

Kotak Mahindra Bank to sell 20 million shares to Heliconia

At 11am, Kotak shares were up 0.84% at Rs634 apiece, while the benchmark 30-share Sensex was down 1.45%. Photo: Ramesh Pathania/Mint

Live Mint : Joel Rebello:Fri, Apr 12 2013. 11 31 AM IST

Kotak’s share sale at Rs.648 apiece will infuse a total of Rs.1,296 crore into the bank

Mumbai: Private sector Kotak Mahindra Bank Ltd said on Friday it will issue 20 million shares on a preferential basis to Singapore-based Heliconia Pte Ltd at Rs.648 apiece.

Kotak’s board approved the share sale, which will infuse a total ofRs.1,296 crore into the bank, at a meeting on Thursday.

Heliconia is an affiliate of the Government of Singapore Investment Corp. Pte Ltd.

At 11am, Kotak shares were up 0.84% at Rs.634 apiece, while the benchmark 30- share Sensex was down 1.45%.

“Now Is Our Time” An Interview with Sheryl Sandberg by Adi Ignatius,COO of Face Book

Photography: Jonathan Sprague

HBR ;April :2013

Since becoming the COO of Facebook, in 2008, Sheryl Sandberg has managed the social media giant’s complex business operations. 

More recently she has taken on a second, no less public role outside the company as an outspoken advocate for women aspiring to leadership positions. 

Her new book, Lean In—which Sandberg describes as “sort of a feminist manifesto”—is a call for women to act in their own behalf to overcome institutional and personal barriers to success. 

In this edited interview with HBR’s editor in chief, Adi Ignatius, Sandberg explains why the workplace is ready for a revolution.

HBR: What do you mean when you refer to your book as “sort of a feminist manifesto”?

Sandberg: The book is a combination of things. It’s partly stories from my own life and experience, partly data and research about gender issues, and partly a call to action by and for women.

Would you describe yourself as a feminist? That word has taken a beating in recent years.

Had you asked me that when I was in college, I would have said I was not. But I think we need to reclaim the “F word” if it means supporting equal opportunities for men and women.

What’s the big idea in Lean In?

The book is for any woman who wants advice on how to sit at any table she wants to sit at, and for any man who wants to be part of creating a more equal world. If we could get to a place of true equality, where what we do in life is determined not by gender but by our passions and interests, our companies would be more productive and our home lives not just better balanced but happier.

You talk in the book about reigniting a revolution. How would you like to see that happen?

Women are making progress at every level except as leaders. We started accounting for 50% of college degrees 30 years ago, but progress at the top has stalled. For the past decade women in corporate America have held only about 14% of C-suite jobs and 17% of board seats. There aren’t enough women sitting at the tables where decisions are made. Reigniting the revolution means I want us to notice all of this and find ways to encourage more women to step up and more companies to recognize what women bring to the table.

What’s the cost to society when women don’t pursue their ambitions fully?

Warren Buffett has said, quite graciously and famously, that one of the reasons for his success is that he had to compete with only half the population. The more people who get in the race, the faster the running times will be.

Some have criticized you for essentially blaming women for not being “better,” even though many of the challenges they confront are institutional. How do you respond?

Women face huge institutional barriers. But we also face barriers that exist within ourselves, sometimes as the result of our socialization. For most of my professional life, no one ever talked to me about the ways I held myself back. I’m trying to add to that side of the debate. There’s a great quote from Alice Walker: “The most common way people give up their power is by thinking they don’t have any.” I am not blaming women; I’m helping them see the power they’ve got and encouraging them to use it.

Say more about how women hold themselves back.

One important way, as I write in the book, is that they “leave before they leave.” That is, they take themselves out of the running for career advancement because they want to have a family. But in some cases they’re making these decisions years in advance—before they even have a partner! That should be a time when they lean in, not pull back.

We’re talking a lot about what women do wrong. What do female leaders do well that men should emulate?

I don’t believe there are stereotypical forms of male and female leadership. But I think there are things we’re encouraged to do as women that can be good for all leaders. Women are often very good listeners. They are often good consensus builders. They can make teams cohesive.

Illustration: Walter Newton

Is the ultimate goal for men and women to become more like each other, or to identify and celebrate the differences?

I think we want to understand the differences and celebrate them. But we need to break down limitations imposed by stereotypes. We don’t really encourage women to be leaders. We call our daughters—but not our sons—bossy. We overestimate our sons’ crawling abilities and underestimate our daughters’. Women are given messages all through their lives that they shouldn’t lead. At the same time, the world still isn’t very welcoming or respectful toward full-time at-home dads.

I’ve asked female CEOs to talk about the experience of functioning in what is still essentially a boys’ club, but they inevitably decline, saying, “I view myself as a CEO, not as a ‘female CEO.’” Surely there’s a difference worth exploring.

Had you asked me that question five years ago, I would have said the same thing. No one talks about gender in the workplace, because if you say the words “I am a woman,” the other person is likely to hear “I want special treatment” or “I’m going to sue you.” A man who runs a large organization told me it’s easier to talk in public about your sex life than it is to talk about gender. But there are real gender-based issues: how we understand ourselves, how we experience each other. One of my goals is to make gender an open and honest topic in the workplace.

Why do so many highly educated women leave the workforce?

There are many reasons women leave—from lack of flexibility and discrimination to the desire to pursue other goals. The fact that so many women from top schools drop out of the workforce is one of the most important causes of the leadership gap. If we want to balance out leadership roles in the workplace, we have to balance out responsibilities in the home.

The work-life balance can be daunting. I’ve never met a working mother who feels happy about how she’s doing either as a professional or as a mother. What’s your advice to women who feel so conflicted?

We have to be realistic about our choices. When we measure ourselves against people at work who don’t have other responsibilities, we feel we fall short. And when we measure ourselves against women who are with their children all day, we feel the same way. We need to recognize that we can’t do it all, that we face trade-offs every single minute of the day. We have to stop beating ourselves up for not doing everything perfectly.

You talk a lot about the “likability” gap. Why do female leaders score so poorly in that area?

The data show that success and likability are positively correlated for men and negatively correlated for women. Which means that as women get more successful, they are liked less—both by men and by other women. That’s because we want people to conform to our stereotypes. And when they don’t, we don’t like them as much. We expect men to have leadership qualities, to be assertive and competent, to speak out. We expect women to have communal qualities, to be givers and sharers, to pursue the common good. The problem is, we want to promote and hire people who are both competent and liked. And that’s just much easier for men.

I think it’s fair to ask whether Sheryl Sandberg is a realistic role model. You were top of your class at Harvard, you had a great mentor from early on in Larry Summers, you have a supportive husband who has a great job with flexibility. Your critics contend that you don’t understand the struggles most women face in the workplace.

I don’t hold myself up as a role model. I’m incredibly fortunate, and I have had amazing opportunities and mentors and support. But the struggles I write about are the ones all women face: the struggle to believe in yourself, to not feel guilty, to get enough sleep, to believe that you can be both a good professional and a good parent.

Why aren’t more women finding strong mentors and sponsors?

We need to explicitly encourage men to sponsor women. We keep telling women how important these connections are, so women walk up to virtual strangers and say, “Will you be my mentor?” That’s not how it works. You have to find ways to build a relationship. At the same time, senior men in the workplace are afraid to be alone with women, because people might assume something inappropriate is happening. But mentorship is all about being alone with a person and talking one-on-one, and we need to encourage that.

With this book, as with speeches such as your 2010 TED talk on gender, you’ve become a major spokesperson on this topic. How does that fit with what you do at Facebook?

It’s all complementary. Facebook’s mission is to allow people to express themselves and connect to the individuals and causes they care about. I care tremendously about Facebook’s being the very best place it can be. And since I’ve become more public on women’s issues, we’ve had a great track record of getting amazing women to apply and to stay.

You got a lot of attention for saying you go home at 5:30 to spend time with your kids. Shouldn’t we all go home at 5:30 and detach from work?

We should all find ways to do the things we want to do in our lives. I’m not trying to be prescriptive. It’s hard to admit that you go home at 5:30, no matter where you are in your career. But I did it on purpose to say to people, “Look, I can be both a mother and a professional, and I do it by going home at 5:30.” I also said that after I have dinner with my kids, give them a bath, and put them to bed, I get back online.

You’ve talked openly about having cried in the workplace. Should women and men feel free to embrace the full range of emotions at work?

Crying at work is not a best practice. I’m not recommending that if you want to get to the top, you should break out the tissues. But we’re human, and it’s important to broaden the kinds of behaviors that are acceptable at work.

Do you feel that the way women are portrayed on TV and in the movies contributes to an antifeminist backlash?

I think we need to widen perceptions, and I’m not just talking about body-image issues. The media rarely depict working women with children as happy and adjusted and comfortable with themselves. They always sound harried. Tina Fey remembers going on the road with Steve Carell. They were both doing sitcoms and raising kids. Every interviewer asked her, “How do you do it all?” They never asked that of him. There’s this assumption that women can’t and men can. My goal is to change that conversation.

The media also tend to talk an awful lot about how female executives dress.

I’m lucky I’m not in an industry where that matters. Silicon Valley is awesome; I wear jeans to work almost every day. It’s a great place for women, because it really is all about what you build and what you do.

Is there any part of you that wonders whether there are biological imperatives that justify traditional gender roles?

Well, as Gloria Steinem says, this is about consciousness, not biology. We evolve. For example, humans are biologically programmed to be obese. Our bodies were made to store fat and sugar so that we could survive when the hunting season was over. But we can curb this impulse, and we do. Similarly, I don’t think the desire for leadership is based in biology. Do we really believe men are natural leaders and women are not? I think the desire for leadership is largely culturally created and reinforced.

Ultimately, it seems that the most critical thing for an ambitious woman is a supportive partner.

It’s the single most important career decision a woman makes: Is she going to have a life partner, and is that partner going to support her career? And by “support,” I mean getting up in the middle of the night half the time to change diapers.

I assume men are getting better at that.

They’re getting way better. But they are still doing far less than half the child care and housework. Next time you go to a party, watch what happens when a baby starts crying. Watch the parents and see who gets up. Women still largely have two jobs, and men have one.

Do you feel you have succeeded despite being a woman or because you’re a woman?

That’s a hard question to answer. I’ve had a lot of luck, a lot of sponsors, a lot of mentors. I’ve worked hard. But the success versus likability thing has been difficult. When I had my first performance review with [Facebook CEO] Mark Zuckerberg, he said, “You care too much about being liked, and it’s going to hold you back.” I had something I needed to overcome. And in that case it had to do with gender.

The biggest challenge you face in all of this may be the sense that we’ve been fighting the same battles for decades.

Yes. But I think now is our time. My mother was told by everyone that she had two choices: She could be a nurse or a teacher. The external barriers now are just so much lower. If we start acknowledging what the real issues are, we can solve them. It’s not that hard.