4 min read.Updated: 13 Apr 2017, 05:04 AM ISTVarun Sood
Infosys founders spat, Donald Trump's US visa policy and three consecutive downward growth revisions are likely to weigh in on the Q4 results to be declared today
Bengaluru: For Vishal Sikka, 2016-17 stands as a rebuke.
After three consecutive downward growth revisions, Infosys’s dollar revenue growth in the year ended 31 March 2017 will be at best 7.6%, 150 basis points (bps) lower than the 9.1% growth in 2015-16, and 620 bps short of its first projected 13.8% growth outlined in April last year.
One bps is one-hundredth of a percentage point.
Departure of four executive vice-presidents (EVP) in financial year 2017 (in addition to four EVP exits between August 2014 and March 2016) implies that Sikka continues to struggle to build a stable top leadership team. Further, Infosys continues to look away from acquisitions (it’s been 18 months since the company made its last acquisition), which makes one wonder what Houdini trick the management has to achieve its target of becoming a $20 billion firm by March 2021.
Finally, Infosys founder N.R.Narayana Murthy’s outburst, twice in public, against some of the decisions by the board is another painful blow to Sikka. Agreed, Murthy has not questioned Sikka directly. But few of these decisions, including agreeing to a generous severance money to its former CFO (chief financial officer), and giving a hike to the current COO (chief operating officer), were approved by the management, and so it is naive to conclude that all is okay between Sikka and Murthy.
Understandably, these developments have unnerved shareholders: in full fiscal year 2017, Infosys shares declined 16.2%, more than the 9% fall by BSE IT index, even as the benchmark Sensex index returned 17% gains.
For these reasons, business historians would take note of the fall in Sikka’s popularity: from being hailed as a hero in the first 18 months, Sikka now battles allegations of skulduggery and corporate greed.
So what can Sikka—and Infosys—do to possibly break this impasse?
First, get back growth and improve its execution. A related second measure is to get some growth from three divisions: Infosys BPO, EdgeVerve, the products and platforms unit (together bring about 13% of revenue), and Infosys Consulting. Infosys needs to improve its ability to sell more solutions from these three services to its clients. Lastly, Sikka needs to arrest senior management departures and build a stable leadership team. All this needs to be done swiftly, and once completed, hopefully, any corporate governance concerns of shareholders (including the founders) should be assuaged.
It is important to note here that the displeasure expressed by some of the founders against the board only coincided with the period when Infosys’s growth started slipping (during the first quarter of last year).
Significantly, Sikka’s $8 million performance-related pay as part of his $11 million compensation is a thorny issue, and how the board justifies this variable salary to its CEO on Thursday will dictate if there is a third instance of public spat between Murthy and the board.
Is all this doable? Unlikely.
Simply, because for IT services firms, chasing reclusive growth is more challenging than ever. Moreover, in case of Infosys, nothing short of a miracle can bring back peace between some of the founders and the board and management.
With this as a backdrop, Mint puts the spotlight on five things to watch in Infosys’s fourth quarter earnings on Thursday:
Revenue forecast: Brokerage firm BNP Paribas sees Infosys recording 1.3% sequential increase in revenue at $2.58 billion for the January-March period. The Infosys management will be mindful that this growth will be 30 basis points less than what the company did in January-March last year. Analysts term the growth in the fourth quarter as “exit rate" and a strong growth helps to start on a good note in the new financial year. Again, management commentary for the April-June period will be crucial.
Will Infosys give full-year guidance? For Infosys, providing a growth outlook is one decision which appears to be going down the wire. Analysts believe the management will give a growth outlook. Based on conversations with executives familiar with the development, this paper thinks otherwise and Infosys may discontinue from this practice. The board will eventually take a call when it meets on 12 and 13 April but this decision will decide the road ahead for the Infosys stock.
Performance of top customers: During the second and third quarters, Infosys’s largest client and top five and top 10 clients gave less business to the company. Until the June quarter of last year, Sikka did well to get more business from its largest clients. Since Infosys gets a fifth of total revenue from its top 10 clients, the management needs to reverse this decline if Infosys expects to record sustainable growth.
A rain-check on Infosys’s new initiatives in the wake of President Trump’s strict visa laws: Over the last 33 months, Sikka has steered Infosys to embrace newer ways to do business, such as by bringing elements of user-centric method of Design Thinking. At the same time, Infosys has increased its focus on building platforms, in an effort to move away from people-led model of doing business.
All these measures will be tested as US President Donald Trump works to have a strict policy in place which makes it arduous for outsourcing companies to bring engineers in the US. Hence, commentary on how Infosys is monetising its platforms business and impact of changes in visa will be eyed.
Weak areas: Sikka has been unable to get respectable growth from EdgeVerve and Infosys BPO in his near three-year stint at Infosys. Another disappointment has been that the consulting division too ran into trouble in April last year. Infosys has put in a new leadership team at all three units over the last year, and management commentary on how soon it expects growth from these three units should decide the overall growth for the company.
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