Are Vishal Sikka’s efforts helping Infosys turn around?

CEO Vishal Sikka’s two-year effort to bring back Infosys’ mojo may look undone if one goes by its first quarter results, but industry watchers are not giving it up yet.

After Sikka took over, Infosys followed a familiar script: new CEO fixes the organisation, boosts morale of employees, analyses and lays out acquisition plans in tandem with new revenue streams.

“While the miss in revenues was disappointing, we believe Infosys will be able to recover a large part of the lost ground next quarter,” says Sandip Agarwal, analyst at Edelweiss Securities. However, insiders claim there could be some turbulence ahead. “While one swallow does not make a summer, going forward, be prepared for further turbulence,” says a former employee who did not wish to be named.

Last week, Infosys cut revenue guidance to 10.5-12 per cent, in line with Nasscom’s outlook of 10-12 per cent for the year. However, the forecast was lower than Infosys’ original industry-beating guidance of 11.5-13.5 per cent.

The ‘turbulence’ comes from many directions. The impact of Brexit looms large and has the potential to delay tech spends as companies wait and watch. Wipro and Mindtree have already issued caution around Brexit’s medium-term impact, while maintaining that it will open up opportunities. Europe de-grew marginally in the June quarter, contributing 23 per cent from 23.4 per cent in the March-ended quarter.

The boss’ missive Sikka, however, believes performance has nothing to do with Brexit, and that IT systems change with changes in regulation. In an internal letter, he expressed disappointment over the company’s performance, but goes adds that a 90-day cycle means little on a long journey.

While that may be the case, this raises questions on whether Sikka’s turnaround is real. Infosys plans to hit $20 billion in revenues, $80,000 in revenue-per-person and improve EBIT (earnings before interest and tax) to 30 per cent by 2020.

In the second and third aspect, the company is long way off. Currently revenue-per-employee stands at $51,000 and operating profit margins in the June quarter, was 24.1 per cent, marginally higher than last year’s 24.01 per cent. On the business model front, revenues from fixed price projects were 44.9 per cent as compared to 55.1 per cent from Time & Materials projects, which are getting commoditised.

Also, many customers are asking for price discounts in commoditised services. “The impression in the market is that Infosys is trying to buy growth with aggressive pricing, which is tricky now,” says Peter Schumacher, CEO, Value Leadership Group.

For Infosys to achieve this milestone, it needs to grow at a CAGR of 17 per cent for the next five years. However, revenue growth will remain in the low single digits in the next few years, according to TBR’s IT Services Vendor Benchmark Index.

Rahul Jain, Vice-President, Research, Systematix, says the $20-billion target was more aspirational, and needs to be seen contextually. He also said changes in the organisation may have begun much earlier than at the time of the results, and hence cannot be termed a knee-jerk reaction.

Rising attrition But increasing attrition is certainly a cause for worry. It went up in the March-ended quarter to 21 per cent, from 17.3 per cent in the previous quarter.

To stem the rot, Infosys has brought back the stock incentive rewards programme for select performers which will be extended to all over time. “It is more of a confidence-building exercise,” says Kris Lakshmikanth, CEO, Headhunters India.

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