More pain, uncertainty ahead for investors

Business from large clients suffers, volume growth slows in last one year

Infosys’ stock plummeted 10 per cent on Friday, reacting to Vishal Sikka’s resignation. Given the already weak demand and other headwinds plaguing the sector, the uncertainty surrounding Infosys, can lead to more pain for investors in the coming months.

Vishal Sikka — the first external CEO in Infosys — took over the reins of the company in August 2014 when thethe company was lagging behind industry growth.

Addition of large clients was sparse and exodus of employees, including top-level ones, had taken the attrition rate to about a fifth of the employees (in 2013-14). But Infosys’ prospects looked promising under the leadership of Sikka given his forte in technology and experience in SAP.

Infosys delivered on expectations. The company witnessed a turnaround in 2015-16 and the stock rallied by nearly 30 per cent between August 2014 and August 2016, outperforming its peer TCS.

Sikka’s focus on design thinking, automation and re-skilling of manpower paid off. Between 2013-14 and 2015-16, the number of $50-million plus clients increased from 42 to 52. The number of $75-million plus clients increased to 31 from 24. Attrition was down to 13.6 per cent from 18.7 per cent and employee utilisation improved sharply to 80.6 per cent from 76.4 per cent.

Revenue growth too started to recover. Growth that had slipped to 7.1 per cent (in constant currency terms) in 2013-14 from 12.4 per cent in the previous year, rebounded to 13.3 per cent in 2015-16.

The company’s achievements on the digital and automation front too have been healthy. The company saved about 11,600 FTE (full time employee) worth of effort in 2016-17 (vs about 4,000 FTE worth of effort in 2015-16) with the use of automation solutions in application maintenance and packaged systems maintenance and pick up in BPO and infrastructure management businesses.

Revenues from new areas — cloud, artificial intelligence, big data, internet of things and others (which were not in existence prior to April 2015) made up for half of the additional $2 billion in revenue that came in 2015-16 and 2016-17. In the June 2017 quarter, 8.3 per cent of the company’s revenues came from the new services.

Improved employee utilisation and the cost savings from automation has helped Infosys maintain its operating profit margins in the 24-25 per cent range even as peers including TCS suffered severe margin pressure.

What now?

Infosys’ performance has taken a back seat in the last one year. Challenges within the sector has been intensifying with clients cutting IT spends. Internally, the constant tussle between Infosys co-founder Narayana Murthy and the company’s board has taken a toll on the business too.

In the last one year, the traction in business from large clients has suffered. In 2016-17, revenue from the top 10 clients was flat relative to the previous year. In the recent June quarter, revenue from this bunch of clients was down 4.5 per cent y-o-y.

Overall volume growth, which was in double digits in 2015-16 and the first half of 2016-17, slowed by the end of 2016-17. In the June 2017 quarter, volume growth was about 7.5 per cent y-oy.

At a time when global IT spends are shifting from traditional services to the new age solutions, and pricing pressure has been rising. Given that the top 25/50 clients of Infosys were monitored directly by Vishal Sikka, it is unclear how the company will carry on its business as usual. The future of all new software and software services businesses — of Mana, Panaya, Skava, and Edge — that Sikka kicked off may take a backseat now.

Investors should brace themselves for more pain and uncertainty over the coming months.

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