Infosys In Light of Recession Fears

| About: Infosys Limited, (INFY)

The general feeling of the West has been that the rise of the rupee would slow down the immense growth of business being funneled into India. The reality is that growth continues to boom in India, barely slowed by currency exchange rates. The short term looks alright for Infosys (Nasdaq: INFY).

Infosys’ Q3 revenues posted at $1.084 billion, which is a YoY increase of 32% compared to the same quarter in 2007, and a 6% increase versus the previous quarter. Net profit is expected to post at $299 million, up 7% from Q1, and 20% higher YoY. The boost in revenue was attributed to the 47 new clients that were added in Q3. Guidance forward into Q4 expects Infosys to earn between $1.136 and $1.142 billion in revenue, and between $4.17 and $4.18 billion for the fiscal year in total. Its liquid cash balance exceeded $2 billion.

The stock, however, is getting hit because of the CEO’s comment that deals are taking longer to close.

With the U.S. recession looking somewhat definite, the future seems cloudy for continued revenue growth in the neighborhood of mid-30%. However, it has also been historically true that as businesses experience slowdown in the U.S., they move more and more of their operations off-shore, which is to the benefit of Infosys and others.

Infosys continues to gain business due to market slowdowns and tighter operating cost limitations on businesses in Western countries. However, the mega-deals are dropping in number and taking longer to close. There is also an increasing expectation on what is dubbed mature outsourcing, creating a demand on Infosys and competitors to provide the right mix of onsite and offshore services, including more strategic consulting.

In light of this, Wipro is in a $7 Billion acquisition discussion with Cap Gemini. Should Infosys merge with Accenture (NYSE:ACN)?

I don’t think so. I have said that the time has come for Infosys to take a good look at the software eco-system in the U.S., and decide on a strategy that enables them to play in the more leveraged technology/IP-driven business models, and change the business mix. The pure body-shopping business needs to start looking at including SaaS, for example.

In fact, in Trend radar 2008: SaaS in the Enterprise, I highlighted the example of manual BPO businesses being replaced by SaaS, a trend that puts Infosys squarely at risk.

In Trend Radar 2008: Offshoring, I highlighted the concern that India’s cost advantage in pure labor arbitrage would disappear over the next 5 years.

Infosys needs to put in place diversification strategies as soon as possible in order to fortify itself against these two key threats.

click to enlarge