11-Sep-2007
*OUTLOOK ARENA** >> VIEWS ON NEWS >> SEPTEMBER 11, 2007*
An overview of IT Consulting (Part I) SOFTWARE SECTOR QUOTES | MYSTOCKS | FREE NEWSLETTER
In our previous articles, we have mentioned our view that there is a need for the Indian IT companies to move up the value chain. Moving up the value chain entails the company to focus more on high-end services like IT consulting, package implementation and systems integration rather than the low-end application development and maintenance (ADM) services. In this article and over the next few articles, we will explore the consulting division of the four pillars of Indian IT industry namely Infosys, Wipro, TCS and Satyam.
The need for Indian IT companies to focus on consulting gains momentum from the fact that a global giant like Accenture derives 60% of its revenues from consulting which is 5 times the consulting revenues of Infosys, TCS, Wipro and Satyam (12%) taken together. In this article we shall delve into the business of Infosys Consulting.
Consulting has been a source of revenues for Infosys since FY00, but its overall contribution to revenues had initially been very nominal. At that time, Infosys did not have a separate entity to focus on the consulting business. Infosys’ real tryst will consulting started since FY02 when it paid Rs 103.2 m to acquire 2.2 m preferred stock of Workadia Inc., which offered consulting services to deploy intranet application, content and services. But the major change came in FY04 when Infosys started Infosys Consulting Inc (Infosys’ wholly owned subsidiary) in the state of Texas with a planned investment of US$ 20 m to add high-end consulting capabilities to its global delivery model.
FY05 was the initial year of operations and the consulting business has been in its investment phase since then. In FY05, Infosys Consulting Inc. serviced 25 clients and generated revenues of Rs. 211.1 m with a net loss of Rs 330.3 m and had employee strength of 68. The investment in Infosys Consulting in FY05 was US$ 10 m.
*Investment (US$ m)* *Employees* *Clients * *Revenues (Rs. m)* *Net Loss (Rs. m)* FY05 10.0 68 25 211.1 330.3 FY06 7.0 176 54 1,430.0 360.0 FY07 3.0 209 89 2,130.0 1,110.0 Source: Annual reports
The business gathered momentum in FY06 and the company had 54 clients in FY06. It generated revenues of Rs 1.43 bn, a net loss of Rs 360 m and had 176 employees on its roll. The company also invested additional US$ 7 m in FY06 and with the initial investment of US$ 10 m the total investment in Infosys Consulting Inc. stood at US$ 17m. The company moved a step forward in FY07 and completed its planned investment of US$ 20 m. In this fiscal, Infosys Consulting recorded revenues of Rs 2.13 bn, net loss of 1.11 bn and had 209 employees on its roll. The client base of Infosys Consulting stood at 89 in FY07.
*What the future holds?* We believe that the consulting division will be a major source of revenues for Infosys going forward. The company has completed its investment in the consulting division and the recent rumours of Infosys acquiring Cap Gemini also stems from the fact that at that time Infosys was indeed looking was an acquisition in the consulting space to move up the value chain. Infosys has the highest billing rates in consulting among its Indian counterparts and is able to garner business from some of the high profile clients in this space. Once this division turns positive at the PAT level, which the company hopes it will happen soon, it will definitely give Infosys an edge over others. Also, the breakeven of the consulting division will give the much-required boost to the company’s operating margins as untill now Infosys has not been able to leverage on its subsidiaries’ performance.
