Infosys' Sikka bets on innovation and new tech to boost growth
With just over two months in his new role, Sikka has given investors hope with a new strategy geared towards refuelling the company's growth engine and regaining its bellwether tag
Vishal Sikka, CEO and managing director of the over $8-billion Infosys has charted out a new plan for the company to revive growth led by innovation across all its services. In an export-heavy and highly commoditised $108 billion Indian IT industry where companies clone each other’s offerings, Sikka is looking to create a differentiating model for Infosys backed by newer technologies such as automation and artificial intelligence.
Over the last few years top-level exits, high attrition rate across the board and below industry growth rate has cast a shadow over the company's future. Sikka’s appointment in June this year was expected to shed some clarity over the road ahead for Infosys, which has failed to record market leading growth over the last few fiscals.
“Mr Sikka, laid out his roadmap to transform Infosys into a next-generation company with factors offering new kind of services and platforms. With the recent announcements around bonus issue, signing of 6 large deals, 100 percent variable payout for entire workforce and endeavour to regain its bellwether tag in the Indian IT industry, Mr Sikka has restored confidence towards the company,” said Ankita Somani, IT analyst, MSFL Research.
“Management indicated towards a new-generation services company which could achieve about 15-18 percent growth with operating margins of about 25-28 percent in the long term. Infosys aspires to achieve these levels as its evolution into a next-generation services company pans out,” said Somani.
While announcing the second-quarter earnings of the company, Sikka pointed out that the new strategy of the IT major would be to create a ‘next generation services company,’ and achieving ‘much better operational excellence’ in its businesses.
“The new dimension is about renewing the existing processes of the business and getting more value out of them. Everything that we do today would be renewed,” Sikka said on Friday.
“Clients are not interested in the previous generation ways where we were simply augmenting for cheaper prices. Now they (clients) are more interested in software developments that would find new ways and engage with customers, newer markets and new business models,” said Sikka, stressing on plans to ramp up the company’s expertise in areas like cloud, mobility, analytics and big data.
The 47-year old Sikka, a Ph.D. in computer science from Stanford University, has led multiple initiatives to accelerate innovation and research in his prior role at the German software company SAP.
The Infosys chief was clear that the company’s future now lay in new technologies relevant to emerging businesses, and that it would explore acquisitions to build expertise into those areas.
“The new CEO (Sikka) has outlined his strategic vision for the company, which, we believe, should allow Infosys to achieve higher growth rates and sustain margins over the longer term. We remain optimistic on the future prospects of Infosys,” said Dipen Shah, head, Private Client Group Research, Kotak Securities.
Industry experts feel that the Indian IT services companies have recognised that software products and platforms is a key vertical and the way ahead. The current way of doing business involving time and material contracts, addition of headcount in a linear fashion are increasingly getting commoditised.
However, the software product story in many Indian IT-services firms has mostly been subservient to services because of its long gestation period and unpredictable revenue cycles.
Analysts point out that the key area where the Indian companies have failed was in ensuring dedicated and separate organisations for the products and services businesses.
For the July-September quarter, the Bangalore-based IT firm recorded net profit at $511 million on revenue of $2.2 billion. Year-on-year profit jumped 33.4 percent, while revenue was up 6.5 percent annually.
Infosys also announced an interim dividend of Rs 30 per share and a bonus stock issue at a 1:1 ratio to increase liquidity of its shares and expand the retail shareholder base. “However, the company still has $5.5 billion in cash and we would prefer a comprehensive capital allocation strategy from management,” said Bhuvnesh Singh of Barclays Equity Research.
In rupee term, net profit was recorded at Rs 3,096 crore during the second quarter, up 7.3 percent sequentially, while year-on-year profit was up 28.6 percent. The IT-services company posted revenue of Rs 13,342 crore, growing 4.5 percent quarter-on-quarter, while y-on-y it was up 2.9 percent.
“The changes in sales force, the new go-to-market strategy and focus on social, mobility, analytics and cloud (SMAC) space are the key ingredients of the recovery in revenue growth, in our view,” said Singh of Barclays.
During the second quarter, Infosys and its subsidiaries added 49 clients. According to Somani of MSFL Research, Infosys indicated that though the deal pipeline seems to be better than what it was the same time last year, the company continues to remain focused on reviving growth momentum.
Shares of Infosys closed at Rs 3888.95, up 6.68 percent on Friday on the Bombay Stock Exchange, while the sensitive index, Sensex, closed down 1.28 percent.
