Sikka's first year ends with signs of progress for Infosys

When Infosys last month announced its results for the quarter ended June 30, analysts were taken aback by the pace of revenue growth: 12.4 per cent year-on-year and 7 per cent quarter-on-quarter. For long, the company was happy to be the most profitable company in its peer group. Now, it seemed to have jettisoned that conservatism: it was ready to sacrifice profitability for growth. In the one year after he became the first non-promoter CEO & managing director of Infosys, Vishal Sikka is believed to have sown the seeds of change in the 34-year-old company.

Has he? One year is hardly enough to overhaul a company, especially in a sector where technologies become redundant every day. Analysts say early signs of change are visible, though they would like to watch the performance for a few more quarters before passing judgement on Sikka.

GOALS ACHIEVED...
  • Instilling confidence in the workforce and boosting their morale
  • Consistent initiatives like tech-focused acquisitions
  • Gaining back the pace of revenue growth
...WHILE SOME REMAIN
  • To show industry-leading profitability
  • To bring back  attrition to a comfortable level
  • To show steady growth in financial performance in the coming quarters
  • To get back the industry ‘bellwether’ status

"With Infosys reporting its best quarterly revenue growth in the last 15 quarters, it might be tempting to suggest that Sikka has turned around the company and that Infosys is set for a solid growth trajectory," says Thomas Reuner, managing director (IT outsourcing research), HfS Research. "However, the road ahead will remain a bumpy one. Infosys has to manage its re-alignment with its peers. To catch up with its peers, the company has to continuously outperform them."

Target for growth

After he took over in August last year, Sikka said his target was to reach revenue of $20 billion by 2020, operating profit margin of 30 per cent and revenue per employee of $80,000. The route to that target is clear in Sikka's mind: get back to industry-level growth and then make investments in automation of services that will fatten the profit margin and raise turnover per employee.

Investors, though, would like to know whether higher profitability would follow faster growth. At some point, which may not be too far, the company will be under pressure from investors to improve its profitability.

In order to address the declining profit (during the June-ended quarter, EBITDA margin was down 70 basis points year on year and 160 basis points quarter on quarter), Sikka has laid out a road map on how to use automation tools for repetitive work, which would reduce the need for human intervention. For that, he is also looking to acquire technologies.

But there is a significant risk involved when one chooses to acquire such capabilities inorganically. For example, the automation and digital platforms like Panaya or Skava, which Infosys acquired earlier this year, won't give significant revenue contribution on their own - the success of those acquisitions depends on how well the company is able to integrate these platforms in each of its service lines for improved efficiency.

"When Sikka took over, Infosys was already working towards automation and making its offerings more elastic. What Sikka has brought to the table is focus, urgency and a relentless drive to turn Infosys into a customer-centric organisation," says Peter Bendor-Samuel, founder & CEO of Everest Group, but he adds in the same breath: "Till date, the modest increase in growth the company has seen is attributable to better execution. We have not yet seen significant results from the automation efforts, though these take time to implement and bring to market."

Infosys attributed the decline in margin in the June-ended quarter to increased spending on automation, newer initiatives and employee compensation. But, these expenses the company will have to incur if it wants to stay in sync with the shift that is happening in the technology buyers' market. Some suggest Infosys may have become more accommodating in pricing, especially for commoditised services like application maintenance and support and for infrastructure management services where deal flow has become thin.

"Our first priority is to get revenue growth to reach the industry level. And as we start investing in automation, new services and renewing our existing set of services, as the revenue per employee starts going up, the margins will automatically go up," Infosys CFO Rajiv Bansal recently told Business Standard.

Retaining employees

The fly in the ointment is employee attrition. Despite all the employee-friendly initiatives Sikka has introduced, attrition continues to be high at Infosys. Other than promotions and salary raises, one of the key things that Sikka has brought to the table is his ability to talk in the same language as the techies. Initiatives such as flexibility at the workplace - whether it is the use of social media or wearing formals - have to an extent helped win the confidence of employees, but it still has a long way to go. "Within that context, Sikka has given the employees a sense of pride as well as pointers for the direction of travel referenced by automation and artificial intelligence," says Reuner of HfS Research.

In the short term, the last quarter's performance of Infosys has certainly ignited the expectations of investors. That means, the bigger challenge before Sikka in the near-term would be to continue to show steady growth momentum and even better the previous ones. While the company has sounded optimism for the July-September quarter, it's the seasonally weak second half of the financial year when it will go through the real tests.

Sikka, for his part, looks confident. "I think that the initiatives that we have started since the beginning of my journey have been producing results in small but measurable ways over the last 10-11 months. The results were small in the beginning, but they were clear. These are still early results, I would say, but they are beginning to gain momentum and we are starting to see that," Sikka said during the earnings press conference last month.

Words of praise

The Infosys old guard shares his optimism. "There is a huge technology transformation happening in the marketplace which is disrupting every industry including IT services. Being an outsider, Sikka is well-positioned to change the status quo and make this transformation happen," says V Balakrishnan, former CFO and board member who continues to own Infosys stock.

A few days after Sikka took over last August, Balakrishnan, along with a few other investors, including former CFO and HR head T V Mohandas Pai and D N Prahalad, had demanded a "large and consistent (share) buyback programme to show confidence in the management and the business model."

"Sikka has been very bright, adaptive, customer-focused and a good leader," says NR Narayana Murthy, one of the six founders of Infosys. The proof will be in Infosys' profits.

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