Vishal Sikka effect? Infosys' Q1 revenue growth fastest in 3 years

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Deepak Mandal, Star Live 24
Wednesday, July 22, 2015
Published On: 14:16:44 PM

BENGALURU: Infosys has begun the first quarter of fiscal 2016 with surprisingly strong revenue growth and an unexpected bump-up in annual guidance, raising hopes that CEO Vishal Sikka's 'renew and new' strategy may be beginning to pay off.

At 4.5%, quarterly revenue compared to the previous three months expanded at its quickest pace in more than three years, and for the first time in at least two years Infosys trumped larger rival Tata Consultancy Services in quarterly revenue growth.

"We had a great quarter," Sikka during a post-earnings press conference on Tuesday. "We are still early in our journey towards becoming a next-generation services company. However, this quarter gives us something to smile about and good reason to be confident."

Shares of Infosys, India's second-largest software company behind TCS, soared by 11.5% to close at Rs 1,116.35 on the National Stock Exchange.

Shares of Wipro, which announces results on Thursday, rose by 1.7% and HCL Technologies gained 2.5%. TCS, which failed to meet expectations with revenue growth of 3.5%, saw stock fall by 0.7%. Technologies such as cloud computing and advancements in areas like automation and data analytics are shaking up the way software services are created and delivered. 

Firms are all trying to strike the right balance between traditional bread-and-butter services which bring in the revenue while positioning themselves to cope with changes brought on by advanced technologies and new business models.

Infosys, which Sikka says is aiming to be a "next-generation services company" by finding the balance between "renew and new," also raised its dollar guidance for revenue growth by 100 basis points to 7.2-9.2%.

It kept the guidance in constant currency unchanged at 10-12%. Software industry grouping Nasscom expects 12-14% revenue growth this fiscal year.

Tom Reuner, managing director at HfS Research, said customer wins such as a large order from Deutsche Bank appear to indicate progress with sales execution.

Employee morale is also better, he said, because of the strategic vision of altering perception of Infosys as an innovator by focusing on automation. However, he cautioned that while "solid results are encouraging, the road to recovery will remain a bumpy one."

Since Sikka joined last August, he has strengthened the top management team by hiring a number of high-profile former SAP colleagues, executed one of Infosys' largest ever acquisitions, invested in next-gen startups and carried out a massive internal overhaul, which includes large-scale re-skilling of employees. For the April-June quarter, Infosys posted a net profit of $476 million, compared to $482 million a year ago.

Revenue jumped to $2.26 billion. Analysts on average were expecting a sequential revenue growth of 2.7-3%, according to an ETIG poll of brokerages. Infosys' robust performance was powered by strong growth from its largest market North America, and from verticals such as manufacturing and retail.

Sikka said that Infosys is targeting the "middle of next year" to get back to industry-leading growth. "I feel good about these results, given the good momentum that we have now going into the rest of the year," he said. The latest quarter also marked a shift from Infosys's earlier strategy of protecting margins at all costs, with the company showing signs of pursuing growth at the cost of margins.

Operating margin during the quarter fell to 24% from 25.7% in the previous quarter. During the quarter, the company signed six large deals worth $688 million. Annual business from Infosys' largest customer Bank of America also topped $300 million.

In a separate announcement, Infosys said that it invested $1.4 million (Rs 9 crore) from its $500-million innovation fund to pick up a minority stake in ANSR Consulting, a firm that helps global companies set up service and delivery centres in India. Attrition rates, which have been a continuous headache for Infosys over the past few years, fell to 14.2% from 23.4% last year on a quarterly annualized basis. The company added 79 new clients during the quarter. Infosys also said it had won 15 deals using the platform from Panaya, an Israel-based company it bought earlier this year.

Sikka and his team have an ambitious blueprint — to make Infosys a $20-billion company by 2020, with more than 82.5% being generated from the traditional core outsourcing business, and the rest from acquisitions and newer areas such as cloud computing, artificial intelligence and analytics.

On Thursday, Sikka said the company should comfortably achieve its target of revenue productivity of $80,000 per employee by 2020, but that margin target of 30% maybe more difficult to get. Rod Bourgeois, head of research at DeepDive Equity Research, said attributed Infosys' performance in the quarter to solid execution, but said this has to be sustained. "Infosys' new strategies need to prove themselves over multiple quarters; one quarter of better execution is encouraging, but doesn't necessarily make a trend," he said.

Courtesy-The Times Of India

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