Well begun but half done

Vishal Sikka is steering Infosys away from pricing pressure but investors want more

Vishal Sikka completed a year at the helm of Infosys, the country’s second largest IT services company this July, but it seems investors are still not gung-ho about the industry bellwether’s progress. Though revenue growth in the second quarter of FY16 beat several analysts’ estimates, the downward revision in revenue guidance for second half of the fiscal came in as a nasty surprise for the Street. The Bangalore-based company made a downward revision in its dollar revenue growth guidance from 7.2%-9.2% to 6.4%-8.4%, citing seasonality factors and client-specific headwinds. Not surprising the stock lost steam, ceding 4% when the results were announced on Oct 12.

But a closer look does show some positives, especially the two buyouts -- after Sikka took over – aimed at acquiring the “technology of tomorrow”. Skava, the digital experience solutions provider which was acquired in June for a consideration of $120 million, migrated two large retail customers to its latest platform in the September quarter. After winning 15 new deals through joint offerings with its new parent last quarter, the newly-acquired automation platform provider Panaya was chosen by Scotland-based Baxters Food Group to upgrade its business suite. As per reports, Infosys forked out $200 million from its cash-rich kitty to acquire Panaya.

The deals are of material significance. Rajiv Mehta, analyst at IIFL, points out that the wins in the second quarter at around $1 billion is the highest-ever for the company.They were able to leverage the new acquisitions by successfully integrating them. This has resulted in better client mining,” explains Mehta. In the second quarter, Panaya brought in 53 new clients. Sikka mentioned that Panaya was now helping Infosys with larger engagements. “There are more than 50 opportunities with a joint Infosys-Skava solution. The synergies are clear in cloud, automation, and in new digital experiences,” Sikka clarified.

Margin gains

The new acquisitions are helping Infosys implement its strategy of people-plus software to hold onto its margins even as the sector is facing pricing pressure due to cut in global IT spending. “…I think the key is the downward pressure on price that we see in the industry is not a one-time thing. I think this is a much longer lasting, sustained trend that we have to deal within the industry,” added Sikka. He feels the right way to deal with this is through automation, by using Infosys Information Platform, Ki and Do services (Infosys Consulting) and bringing Panaya and Skava in relevant areas. In the September quarter, Ebit margins saw a sequential rise of 150 basis points to 25.5%.

Mehta believes the strategy will slowly pay off. “Earlier, the execution was more people-driven. Now, it is software plus people driven execution. So, you can save on the number of people being deployed on a project and also on certain costs. So, when there is pricing pressure, cost-savings are just passed as pricing discounts without hurting your margins.” Through its new focus on enhancing employee productivity through automation, Infosys is targeting revenue per full-time equivalent (FTE) of $80,000. For quarter-ended September 30, 2015, the FTE was at $51,200.

While the downward revision of FY16 guidance does cast a aspersion on the company’s aspiration to lead industry growth in FY17, analysts believe the September quarter also shows that Infosys has been moving in the right direction in executing the new vision laid out by Sikka. But the CEO himself does not want to play to the gallery. Sikka in his blog played down the first year anniversary terming it as "pointless constructions". The 48-year-old wrote, "I don't understand the significance of the one-year mark. I never did. Anniversaries and artificial ritualised celebrations, beyond the uniquely personal aspects of these, somehow always seemed to me to be pointless constructions." He goes on to mention that meaningful progress should only be measured over a longer duration and not quarters. But it seems the Street is in no mood to listen.