Infosys Ltd’s leadership transition was supposed to have gone smoothly. The company’s new board, led by Nandan Nilekani, had moved swiftly in calming investors’ various concerns about Vishal Sikka’s abrupt exit, and even found a replacement in quick time.
Infosys’s Q4 results announcement and guidance for fiscal year 2018-19 (FY19) has upset the calm. The first jolt for investors was the company’s statement that it expects operating profit margin to decline from 24.3% in FY18 to between 22% and 24% in FY19. The new Infosys CEO Salil Parekh, evidently thinks that the company needs to increase investments to pursue growth. The second decision that irked investors was the firm’s plans to sell Panaya and Skava, companies that were acquired by Sikka to enhance the company’s digital capabilities.
Since digital services are still a high priority for Parekh, the decision to sell Panaya and Skava is intriguing. Perhaps, this is being done with a view to get rid of past baggage—there had been allegations that not all was what it seemed when these companies had been acquired. Whatever the reasons, the exit can hurt growth calculations, even if only marginally.
Investors are evidently worried. Infosys American Depository Receipts fell 8% in early trading in New York, although it must be noted ADR prices can be volatile.
Infosys said it expects revenues to grow 6-8% in FY16, a notch higher than the 5.8% it reported for FY18. “This would normally be seen as a conservative guidance; but given the low growth in recent quarters, we no longer see it as conservative," says an analyst at a multinational brokerage.
What’s more, while the company management had sounded gung-ho about demand from the mainstay banking, financial services and insurance (BFSI) sector earlier this year, its comments were far more subdued this time around. It said on a call with analysts that demand within the BFSI was strong in certain pockets, but was offset by large banking clients in North America who were resorting to insourcing for some of their technology needs.
In the March quarter, revenues from the BFSI segment were more or less flat in constant currency terms, and growth in key geographies such as US and Europe was muted. Overall revenues grew just 0.6% sequentially.
Against this backdrop, it is clear Infosys shares had run far ahead of reality, with investors concluding that the company had moved past its messy leadership transition. Infosys shares had risen to almost Rs1,200, far ahead of levels ahead of Sikka’s exit. That conclusion is now in question.