Tepid results for Infosys offers few positives for firm or industry looking ahead

Trying to scare up new business amidst a rapid decline in its existing, traditional model while negotiating an ugly, public spat with its founders will be just a few of the tough challenges confronting Sikka in the upcoming year
Written by Rajiv Rao, Contributing Writer

The first thought that may occur to Infosys watchers upon viewing their recent results is "how on earth is the company going to hit that much ballyhooed, publicly-stated target of $20 billion in revenues by 2020?"

The goal seems all the more outlandish considering the firm's less-than-stellar results that saw quarterly revenue for the month-ending March 31 rise to $2.57 billion from $2.55 billion in the preceding quarter, a 0.7 percent sequential rise in dollar terms, but no real growth when measured in constant currency. The firm's net profit declined 0.8 percent sequentially to $543 million (and 2.8 percent sequentially to Rs 3,603 crore.)

Revenue growth was even more of a stark disappointment in year-on-year terms when you compare FY '17's 5.3 percent in dollar terms versus FY '16's 15 percent--underscored by the fact that Infosys still narrowly missed its guidance for FY '17 despite being revised three times over the last year.

What really got everyone's attention was the company's revenue guidance for the upcoming year (FY '18) which it slotted between 6.5 percent and 8.5 percent (in constant terms) and 6.1 percent and 8.1 percent (in dollar terms)--a big let down for analysts who were hoping for growth between 7 and 9 percent. So much so that the Infosys stock got immediately hammered, tanking by almost 5 percent over the course of the day. This guidance is incidentally lower than that of rival Cognizant's which pegs its growth in the coming year to between 8 percent and 10 percent.

Steering this ship has become far from an enviable task for Infosys CEO Vishal Sikka who was enjoying being feted for leading a remarkable turnaround of the firm as recently as early last year, only to be hit by a triple whammy.

First, he was dragged into an ugly, public spat with co-founder Narayana Murthy, who questioned the firm's decision on compensation doled out to senior executives. Even Sikka's variable pay of $8 million for this last year out of a total $11 million package was contested and the unseemly back-and-forths continue to this date. Then came the turbulence surrounding Brexit followed by uncertainties surrounding President Trump's actions against the H-1B which Infosys and its peers have been heavily leaning on to undertake projects in the US.

"Unanticipated execution challenges and distractions in a seasonally soft quarter affected our overall performance," said CEO Sikka. "At the same time, we continued to see many positive signs of our strategy execution; our software led offerings continued to show strong momentum and client success, with continued adoption of Mana, our AI platform; Zero Distance marked its 2-year anniversary as a grassroots cultural movement for innovation with strong client resonance, and our employee engagement continued to drive down attrition, especially with top performers."

What Sikka didn't mention was the failure of Infosys to make any significant acquisition in the last 18 months or the fact that the firm saw the departure of four of its senior vice presidents.

There were a few positives: Despite the year's revenue growth issues and the Rupee's appreciation against the dollar, the firm managed to keep its operating margin to 24.7 percent compared with 25.1 percent at the end of December period. However, the tough year ahead with a presumed increase in onsite hirings and continued pricing pressure has forced management to reduce margin estimates further to between 23 and 25 percent.

The firm continues to have its supporters. "Infosys is gaining share in large deals and wallets of large clients, and is positioned well to capture discretionary spends. Near-term volatility and risks pertaining to potential tightening of H-1B rules aside, Infosys is making right investments in automation and digital for sustained profitable growth over the next few years," said analysts at Kotak Institutional Equities in a note to clients.

Sikka has turned the firm around once and there's no reason why he can't do so again. He will have to woo old and new clients with his new product and platform offerings and vastly improve the company's consulting capabilities to match that of rivals Cognizant and Accenture.

Unfortunately, he will have to do so during an unprecedented decline in the fortunes of Indian IT, especially in the bulk of its business which is in the traditional and rapidly commoditized domains such as infrastructure maintenance and application development and not enough traction in the new world of digital. If that isn't bad enough, there's the absurd, public spat with Infosys founders that is hardly going to do anything to burnish the firm's reputation.

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