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Research
Infosys - The rise of Sub‐contracting and Onsite cost - Prabhudas Lilladher
Posted On : 2012-08-22 20:35:08( TIMEZONE : IST )
Infosys' sub-contracting cost has risen to the highest level (3% of revenue) and per employee onsite cost has risen at a CQGR of 3.1% (over the last eight quarters) to the highest level. Despite strong bench and weak volume growth, Infosys continues to increase its sub-contracting cost. We expect the cost to remain sticky in the near term due to higher visa rejection rate and sparsely available talent. We expect the impact to be industry-wide and not restricted to Infosys as the pressure on hiring local talents mount.
- Volume spurt and talent availability are not the reasons: We do not see spurt in the volume as the reason for increase in onsite and sub-contracting cost, unlike in FY11. The volume growth has been steady in H2FY12-H1FY13. Higher bench strength and de-growth in Consulting & System Integration also fail to prove lack of talent availability as the reason for rise in sub-contracting cost.
- Protectionism - Higher visa rejection compels to take measures: An industrywide problem of higher visa rejection rate (L1 & B1) has compelled Indian IT to look for sub-contracting as an alternative to project ramp-ups. L-1 visa issued to Indians declined by 28% compared to 15% growth for the rest of the world.
- Cost may remain sticky: Higher unemployment rate continues to push for the protectionist measures by the government. However, low unemployment rate in Computer & Mathematics create scarcity for the talent, hence, pushing the onsite cost (either in form of local-hiring or sub-contracting) up.
- Per employee data could be deceptive: Revenue per employee for the company is overstated as against EBIT per employee which is understated. However, we do not see sub-contracting as the margin lever.
- Valuation & Recommendation: Consultants hired for the project helped companies to save the bench cost once the project was over. However, the balancing act of sub-contracting and local hiring helped in managing uncertainty in the near term. We only see the possibility of cost reversal if the protectionist measures are eased off. The current valuation of Infosys reflects these costs. Retain 'BUY'.
