Why isn’t Infosys Getting into Banking?

16 07 2010

Infosys Technologies (Infy)  is the bluest of the bluechips in the Indian IT sector. It is usually the first company to declare its quarterly results. The results and guidance given by Infy sets the mood for the earnings season. Like every quarter, Infosys declared its results for the Q1 2011 on the 13th of July.  The market was not enthused as there was a dip in the profits and the guidance is nothing spectacular.

It now appears that Infosys has become a prisoner of its own success. It has become huge with a turnover of nearly Rs 25,000 crore and a workforce of 114,000. Just running this large enterprise and maintaining the profit margins in a volatile environment seems to be keeping the top team entirely occupied. The business model of the company remains largely unchanged in the last 15 years. US (67 %) continues to be the major market. Banking, Financial Services and Insurance (BFSI) remains the biggest vertical, accounting for 35% of all business. Application Development and Maintenance (ADM) accounts for about 40 % of all the services. Consulting and BPO businesses may provide them the breadth of services, but they remain small. Unlike, other Indian IT companies, Infy has not made any major acquisition in India or abroad.

What was a growth stock is slowly becoming a dividend-yield stock. With no major growth plans or big ideas, it will be difficult for the Infy stock to keep its P/E ratio at 25-30 that it commands today.

Now here is a piece of unsolicited advice to the management of Infosys – enter the banking business, by getting a banking license.  RBI has said they would be releasing a few licenses as per the new policy. They could also be looking at acquisition opportunities for the old private banks which may come up for sale. Given their conservatism/arrogance the second option looks unlikely.

Here are a few reasons why Infosys could get into banking:

  • Infosys is a big brand and a solid reputation as a respectable and ethical company. Infosys Bank should command a lot of goodwill from customers as well as investors from Day One.
  • Infy would be having good knowledge of the Banking and Financial Services processes  worldwide thanks to it being their major vertical. Infy also has its own Core Banking Solution Fiancle which may be deployed in the new bank. This would bring down the investment cost significantly. The BPO arm of Infosys can handle a part of the customer service.
  • Infy being headquartered in Bangalore, availability of experienced bankers to handle specialised positions should be easy. Karnataka is home to several banks and bankers. Banking is in the blood of Kannadigas. Mohandas Pai , though Director HR, is basically a Finance person and handles the HR function like an accountant. He could be an asset for the Infosys Bank.
  •  K.V.Kamath, the man who transformed ICICI Bank is already on the board of Infy. He could be given a special assignment to set up this new bank. Great professionals don’t retire. Look no further than E.Sreedharan who took up the Delhi Metro assignment, after being well past 70 years of age.
  • Infy already has its first set of customers. It has 113,000 employees.
  • Infy has a huge cash balance of nearly 15,000 crores. Instead of keeping them as FDs with State Bank and other PSU banks, it could easily deploy a part of this for its Banking business.
  • Infy Bank may not require a public issue. But if its IPO does come out, it can command a huge premium and will be a sell-out.
  • The promoters are occupying the top job by turns. How about the promoters’ children ? They would be ready for jobs now. The Infosys Bank could well be a place for them.
  • Financial inclusion is one of the stated goals of the UPA govt and PM. Infosys could easily deploy its Foundation to get some aam aadmi  to open accounts with the Infy Bank and thereby improve its CSR image further.

If all the above reasons are not convincing, then here is one more. Infosys may have technology in its name, but it is hardly a technology company in a classical sense. It is a huge and efficient bureaucracy where the bean counters rule. If such a  competency is identified with the organization’s core, banking is an appropriate business. I am waiting to open an account in Infy Bank.

– G. Mohan


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