Infy will focus more on larger no. of smaller deals, says CEO

The FY17 guidance of 11.5-13.5 percent in constant currency terms is based on the company’s visibility and is certainly achievable, said Vishal Sikka, MD & CEO of Infosys. Infosys reported stellar fourth quarter numbers with 3.8 percent growth in profit to Rs 9,597 crore and earnings before interest and tax (EBIT) came in at 25.5 percent at Rs 4,220 crore. While pricing has been an issue, operational efficiency along with rupee aided fourth quarter numbers, said MD Ranganath, Chief Financial Officer of the company.

Sikka said that the company has been performing well in most of its verticals. However, some headwinds are still visible in technology and telecom sectors. UB Pravin Rao, President & COO added that not many changes are expected in the energy side of business in coming quarters. Slow traction is now visible in verticals like healthcare, retail and telecom, he said. Another plus in Q4 were the deal wins, which stood at USD 757 million. The aim is to achieve USD 1 billion deal wins in two-three quarters, Sikka said. The focus, he said, will be on larger number of smaller deals. The company’s investment in start-ups also helped in Q4. About 12 of the large deals signed in the last few years have had start-up companies that Infosys has invested in, said Sikka. Below is the transcript of Vishal Sikka, MD Ranganath and Pravin Rao’s interview with Kritika Saxena on CNBC-TV18. Q: On what basis have you given your guidance?Sikka: The guidance that we have given is based on the visibility that we have right now and it is to help guide the market, not to set any expectations or mislead the market, but to guide the market. And, currently based on the visibility that I have, that Pravin and Ranganath have, I believe that 11.5-13.5 percent on constant currency is something that we can do over the course of the year. And obviously, as we learn more, we will continue to revisit that and if necessary, to share that.Q: Specifically, if you break this up into verticals, where is the confidence coming from in terms of the overall client mining perspective and even in terms of the order book. Sikka: In financial services, we are quite excited, quite happy. In manufacturing, we believe that there is a lot to be done in consumer packaged goods, logistics and so on. And also in some areas of healthcare. In energy, there is some downwinds, some headwinds, in telcos, there is some headwinds. But, in general, I feel quite good about the overall picture. It is driven by three things – by the success of the initiative that we have launched. Still in the relatively early stages, but we have seen decided adoption of automation, we have seen tremendous adoption of the grassroots innovation work that we have done and that is starting to materialise with our clients. So, that is kicking in.The new areas that we have been working on are kicking in. And in particular the large deal wins that we have had – we did USD 757 million in large deals in the last quarter which is very good and that does not even count another USD 450 million or so in two other deals that we won in which we do not have a – we call them frame deals. So, we are generally in that billion dollar range that we had set for ourselves. We are kind of getting close to that or already there in some ways. So, we are excited about it.So, all those three – the further adoption of innovation, the further adoption in our operational levers and large deal wins in the pipeline give us the confidence that we can do 11.5-13.5 percent.Q: So, by when will you reach that USD one billion, quarter-to-quarter large deal win figure?Sikka: If you include this frame deals, we already did last quarter, and another one or two quarters ago, we had the same. Hopefully in the course of the next two or three quarters, we will get there because we have quite healthy pipeline of large deals as well and as our clients see more innovation coming from us, things become more exciting and we hope to get there.Q: Realistically speaking, there is a lot of talk about how client contracts are individually shrinking, there is vendor consolidation and as a result of that, specific to US and Europe, there have been challenges. What are the immediate headwinds that you are seeing from a geographic point of view? What are the clients in Europe telling you right now? Are you on the right side of the consolidation?Sikka: Of course, I think if we have, as a great services company, if we have the right mix of offering, the right ear to the ground in terms of understanding the needs that our clients have and the ability to solution towards those, which is what we have been seeing in the large deal wins that we have had. Same thing applies to the smaller projects as well. Actually in smaller projects around infrastructure, around big data, machine learning and so forth and innovative areas, we have also been growing quite well there. And so, but of course, those are larger numbers of smaller projects. And over time, even though for the next couple of years, we do see that a lot of renewals will happen and so forth; and there are large deals to be won. We do believe that over time, the focus will be more larger number of smaller deals. So, we need to have more modernisation, more of a marketplace approach and so on. So, we are equipping ourselves for both of these realities and I feel good about the outlook ahead of us. Q: Another area that you have changed in terms of market dynamics is acquisition. You have been investing in start-ups. What are you going to leverage the start-ups that you have invested in, their capabilities into the larger, even the traditional IT services business and what more can be done on acquisitions now?Sikka: The start-ups are amazing. They have all been growing. We just did a assessment on those and I am quite happy about what Ritika and team have done in the work that they do on start-ups. They bring tremendous value, not only in terms of our ability to understand and participate in what the young in our industry are doing, but also in bringing them to our clients. We have had some large deal wins that we have had with the companies that we have invested in and also others, because Ritika, in addition to investing in start-ups, she manages the engagement with the start-ups. So, there are a lot of them that we do not invest in who also continue to come into our solutioning. And that really helps with many of the larger, probably something like 12 of the large deals that we have won in the last years have had start-up companies that we have invested in as well as ones that we have not be a very integral part of the solution. So, I am really excited about that. It is better in life to hang out with the living than to hang out with the deal.Q: What are the targets that you are looking at to inch up margins?Ranganath: Pricing as you know, has been an issue. Even if you look at year-on-year (Y-o-Y), we have had a pricing decline of 1.1 percent in constant currency. Of course, while the pricing decline is there, we also have scope for operational efficiency improvement that I talk about earlier. If you look at this quarter, our operating margin improved to 25.5 from 24.9 percent last quarter. Of course, rupee helped to some extent. Apart from rupee, sub-contractor expenses came down and that was some of the things that we talked about earlier. Sub-contractor expenses as percentage of revenue came down from 6.3 percent to 5.6 percent. That helped us. Likewise, the utilisation also improved including trainees by almost 0.5 percent. So, the operational efficiency parameters helped us this quarter, in addition to rupee. We will continue to focus on these parameters in the coming year as well – the onsite roll ratios, the onsite effort mix and so on. And that is why we feel that 24-26 percent is the band that we would like to work on and the last year we closed at 25 percent. Coming to the guidance, if you look at typically, Q4 has been a tough quarter for us for the last couple of years. Last year, we de-grew 2.6 percent and this year, we have grown 1.6 percent. That gives us some good exit rate for the financial year. So, a combination of these two and based on the visibility that we see is what we have given.Q: The deal pipeline, as you say is strong, but if you can break up the order book for me, across key areas like financial services, even the damper areas like energy and aerospace, how is the deal pipeline looking like? And you said energy will continue to remain a headwind. There will be immediate headwinds including insurance. How long till you can understand what the future is for these soft areas?Rao: On the energy side, we expect the situation to continue for the rest of the year because of the oil prices and companies continue to focus on cost take out. To some extent, it gives you the opportunity but, we do not expect too much of change in the industry, fortunes, at least for the rest of the year. Insurance, as Vishal said, is more an Infosys specific thing, because our base is much lower and we have slowly started seeing traction. So, we expect to see some uptick through the course of the year. So, those are probably the two industries where we see some softeners from our perspective. Most of last year, telecom was a challenge, but in the last quarter growth was led by telecom to some extent for us and we have slowly started seeing traction in the telecom space. If this continues to be good, retail, CPG and healthcare lifesciences continue to be good, in the manufacturing space, the aerospace, there is some softness, there is good traction. So, net-net, barring one or two sub-verticals, most of the pipeline we are seeing is much more broad based and even as I said, earlier, from a geography perspective as well we are seeing decent pipeline, both in Europe as well as North America. So, that gives us the comfort and confidence about the momentum ahead.