Shashi Bhusan, IT analyst at IDFC Securities, says, “Infosys has definitely seen improvement in revenue growth momentum. There is considerable acceleration in deal closure over the last nine months. Plus, the client specific issues have been addressed and no competitor has taken business away from Infosys.” And this has come at a time when Indian IT companies
have been going through rough weather in recent years as they align their business models away from the traditional businesses towards new growth engines in digital technology such as cloud, data analytics, Internet of Things and automation, among others. The sector has also witnessed cyclical headwinds such as Brexit (could impact demand from the UK, Europe) as well as rising protectionism in its largest market, the US. In this context, Infosys’ guidance appears fairly reasonable. Most analysts have given a thumbs up to Sikka’s strategies as well as performance so far.
Ravi Menon, IT analyst at Elara Capital, says, “We think that the founders should not have a problem with either Sikka’s compensation or his strategy. During the short time since Sikka joined, he has been key in creating value for customers — customer satisfaction rates have reportedly improved and barring the contract cancellation relating to RBS having to shelve its planned spin-off of Williams & Glyn, Infosys has not lost any major projects.” For firms as large as Infosys, the results of any strategy will be evident only 3-5 years from the time it is implemented, he adds.
Though Infosys’ fundamentals have improved in Sikka’s reign so far, the company needs to do a lot more to regain its lost glory and successfully weather the cyclical and structural storms facing the sector. Its newer segments such as big data and analytics platforms must witness improved traction and be a growth engine. Currently, most clients are testing the proof of concept for these platforms. Sustained improvement in these will help Infosys reach the next level.
For now, most analysts believe Infosys could post similar revenue growth and margins in FY18 as seen in the current financial year so far.
Amid rising pressure from the investor community to put its mammoth cash to efficient use, most analysts are hopeful the company could announce a buyback and/or higher dividends sooner than later. Reduction of cash in its books would also push up Infosys’ return ratios.
Though margin pressure will continue given ongoing weakness in pricing and potentially higher costs towards visas, rising contribution from newer segments such as automation could provide some offset. Notably, the increase in these businesses is a key monitorable and could happen at a gradual pace. Any cyclical uptick in demand from US financial services companies
could be a key positive. Acquisition of good companies could also go a long way in aiding Infosys’ revenue growth. However, the new management too continues to be conservative on this front. Infosys scrip currently trades at reasonable valuations of 13 times FY18 estimated earnings.
While the founders are reportedly concerned about Sikka’s compensation, some analysts find it justified. “Sikka is based in Palo Alto, one of the most expensive parts in the world to work from. Considering that, and what CEOs of even much smaller firms based in Palo Alto are paid, his remuneration seems reasonable. It seems even modest considering that bulk of it is accounted for by stock options that vest over a fairly long period,” adds Menon of Elara.
Overall, though Infosys’ strategies are in the right direction and execution has been strong so far, there is more work cut out for Team Sikka.