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Morningstar | Digital technologies, automation, and software platforms will be growth enablers and margin saviors.

Infosys is one of India’s most pre-eminent providers of IT services. However, the company has suffered from its slow-moving legacy past (smaller, more discretionary projects) and out-of-date go-to-market strategy, resulting in low revenue growth relative to peers, margin compression, leadership churn, and high employee attrition. In light of these issues, Infosys has launched a number of initiatives to improve its performance. The company has some way to go before rectifying its position, but a number of signs are promising, with revenue growth, margins, client mining, and employee attrition improving.Infosys benefits from high switching costs, thanks to its commitment to building lasting client relationships, embedded systems and processes, and intimate knowledge of clients’ IT infrastructure. Such switching costs ensure a certain level of operational consistency, and the company’s good financial health reflects this. As a result, Infosys will look to leverage its financial stability and increase its top line while improving its competitive performance relative to peers such as Wipro and TCS.We expect Infosys’ performance to improve moderately through a number of initiatives. To reinvigorate revenue growth, the company is pursuing larger outsourcing opportunities rather than smaller discretionary deals. Infosys plans to hire a raft of new salespeople to open more client opportunities, while offering greater differentiation in contract proposals and using greater process automation (via partnerships such as IPsoft and internally developed platforms like Infosys Automation Platform). In terms of operating margins, management has aggressively reduced costs and launched some optimization initiatives. It will also look to increase its offshore business mix and improve utilization rates. Finally, Infosys has sought to reduce its high attrition rate by giving compensation increases, issuing employees stock, restructuring salaries, and offering more promotions. Consequently, we forecast a steadier operating performance.