After beating the street with second quarter net profit at Rs 3,096 crore, up 7.3 percent sequentially, Infosys's new CEO Vishal Sikka says he sees meaningful revival in business in another two years, in line with Narayana Murthy's timeline of seeing revival in three years. Murthy embarked on the journey of reviving the business last year.
Sikka is keen to transform Infosys into a next generation services company and is looking to renew all the services the company offers. He has a long-term target to grow at 15-18 percent. The company’s long-term EBIT margin range is 25-38 percent.
On buyback, Sikka says it is too early to comment on it, while adding that theirs is a new management team that is committed to growth. He sees opportunity in new areas of growth. However, he adds that demand in some areas is on the decline.
Sikka is committed to achieving industry leading growth and good profitability.
Adding to Sikka’s comment, Rajiv Bansal, chief financial officer of the company, says there is a need for more investment considering that the top priority at the moment is achieving sustainable growth. He also adds that there is always opportunity for further cost optimisation.
Adding to the company's woes, Infosys has also been battling high attrition at around 20 percent. But UB Pravin Rao, chief operating officer says the company is comfortable with 12-14 percent attrition rate, while adding that attrition has declined on a month-on-month basis.
Below is the transcript of Dr. Vishal Sikka, Pravin Rao & Rajiv Bansal's interview with Shereen Bhan on CNBC-TV18.
Q: Welcome to the quarter-to-quarter era, so I hope it has been a grueling intense initiation as far as you are concerned?
Sikka: Yes it has been fun and intense.
Q: In your opening remarks ‘sketchy at this point in time’ which is understandable given the fact that you have only been in office for about 70 days. But let me ask you the fundamental question when you talk about positioning Infosys as the next generation services company and not a previous generation services company. You have talked about artificial intelligence (AI), you talked about innovation and you have also talked about continuing to focus on the bread and butter segment because you will have to do that. What does this mean in terms of reorienting the very core of your business model? If you are talking about positioning yourself as a new generation services company with a key focus not on cost and labour arbitrage but on innovation, what will it mean in terms of redesigning your business model?
Sikka: It means a massive embrace of innovation and massive embrace of new technologies, AI, automation. A great focus on delivering business outcomes and value on innovation, on process improvements and I see that as something that can help us rethink and reinvent each one of our existing service lines without disrupting them. For example business process outsourcing (BPO), a traditional BPO, clients are increasingly not interested in the way BPO used to be done yesterday. They are interesting in achieving great business outcomes and process improvements and process innovation.
We see an opportunity to bring tremendous voice technologies, language processing technologies, automation technologies to rethink all kinds of business processes and we are starting to do that in someway.
Infrastructure management can benefit tremendously from innovation. So the key is to take our existing services and bring a renewal in those with the power of technology, with the power of better efficiency, with the power of automation as well as in operational excellence and so forth.
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Q: Let me now extrapolate your other statement which you said that you want the company to become a bellwether once again. You do know Infosys has not been a bellwether for the last several quarters now, when do you anticipate that all of this is actually going to start delivering in terms of results, when do you anticipate this is going to start delivering in terms of you being able to catch-up with your peers, forget industry leading but on par with industry rate, by when can we expect that? Is FY17 perhaps the earliest?
Sikka: Mr. Murthy started this journey about a year- and-a-quarter ago and that was a three year journey. So, I expect that that is the timeline we will stick to. The nature of the business is such that there is an inherent latency in the adoption and in being able to see the results.
You are seeing the earlier results already so it is not that that we can achieve only a step jump two years later or something like that. So, you will see a continuous incremental achievement and contribution of these new areas. However, a meaningful impact of this will only take more time.
Q: Moving out of a single digit dollar revenue growth - by when do we anticipate Infosys moving out of that?
Sikka: I am deeply convinced that our next generation services company as I have talked about is one that can grow 15-18 percent over time, 25-28 percent margin over the longer term.
Q: You are nowhere close to that.
Sikka: Right now we are not but I expect that over time, over a long-term that is a target that we should easily aspire.
Q: Double digit – I won’t get to 20 percent or even 15-18 percent but NASSCOM, industry rate - by when do you anticipate you will be able to get to that?
Sikka: I think that you should expect that we will be able to start achieving those kinds of results on the timeline that we had started on which was three years from one year ago, so I would say two to three years out from now.
Q: You said that you will require till at least April to articulate what your plan as far as capital allocation is concerned. Are we given to understand then that even your strategy as far as merger and acquisition (M&A) or inorganic growth is concerned we will perhaps have to wait till April in order to hear more clarity on that?
Sikka: I think that this is an area where you want to be able to jump at opportunities that surface. However, we are carefully looking at our opportunities and we are thinking about these new areas and that would be a good timeframe but don’t hold it against me if I ended up announcing something earlier than that.
Q: The street will be very happy if you end up announcing something earlier. They are drawing parallels with what we are seeing happen as far as Cognizant is concerned which has just announced a big deal so they are hoping to see the same aggression from Infosys, so perhaps sooner than April maybe something on the M&A front?
Sikka: You can never say never on these kinds of matters but we are very seriously thinking about these and not from the perspective of growing or acquiring a previous generation company but from the purposes of acquiring new skills, new capabilities that help us accelerate our drive towards the next generation, towards innovation.
Q: Would it be correct to assume that the inorganic growth strategy that you will pursue will be to augment areas like artificial intelligence and so on?
Sikka: Yes.
Q: So that is what you are looking at at this point in time?
Sikka: Yes among other things.
Q: The buyback debate – let’s get that over once and for all. It was taken to the board several times in the past as well. What is the situation now as far as the buyback is concerned. You have announced 1:1 bonus today but is the buyback debate over and done with at this point in time at least till April or perhaps even beyond that?
Sikka: I would hope so. We are a new management team; you can see the result that we have started to deliver on. We are committed to a strategy of growth, we have a very passionate, young, dynamic management team, we see opportunities in different areas and we see opportunities to grow for growth in every area. We would like time to be able to think about and rationally plan in detail what we are going to do and I do see the opportunity to grow the company and to take advantage of many of the positions that we have in those area. It will however take us time over the next couple of quarters to more precisely articulate what those are, so until then it would be wrong to even expect something, a statement from us in that area. However, I do believe that we are a company that is focused on growth and on being able to leverage the cash to be able to invest and grow in new ways.
Q: Will you continue with the Infosys philosophy of protecting margins as opposed to chasing growth because that is another area that analysts would like some clarity on? Are you going to sacrifice margins for growth, is there going to be a change in that Infosys philosophy and ideology?
Sikka: I would not put it as one at the expense of the other. Narayana Murthy always talked about consistent profitable growth. I deeply believe that we need to do both, achieve a great industry leading growth as well as be profitable while doing so.
Q: Let me ask you about the demand environment and you said that you have been meeting with clients across the globe at this point in time to get a sense of what it is looking like. What are the indications that you are getting in terms of IT spending as far as 2015 is concerned, what are the early indications that you are getting, how robust is the demand environment looking today?
Sikka: There are certain areas where there is a decrease in demand that we are seeing and Pravin can talk about it in detail. If I could summarise that at a high level, I have met several clients already, interacted with them over the last 70 days and my sense is that there is never a shortage for demand for innovation, for great value, and in some areas we see a downward pressure commoditising and commoditisation of services leads to a downward pressure.
However, when you talk to clients about delivering value even in the existing areas and certainly in the new areas, there is a great opportunity to deliver great value.
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Q: If one were to look at you being able to get back into the double digit kind of growth rates and catch up with your peers for instance if I were to look at the BPO segment, 9 percent growth for you versus 30 percent for Tata Consultancy Services (TCS). In the infrastructure services side 15 percent growth for you versus 27 percent for TCS. How soon do you anticipate being able to bridge that gap?
Sikka: I think that we will not bridge the gap by following the practices of yesterday. We have seen significant challenges in these areas in the past. I don't believe in just becoming better in efficiency and continuing this downward spiral that the industry seems to be on of lower and lower costs and faster and faster hiring and things of this nature. I think that is the wrong direction for the industry. A much better idea, a much better direction is one that is based on innovation and one that is based on a massive embrace of automation and new technology.
Q: What will that also then mean in terms of pricing and being able to attract premium as far as pricing in concerned if you do indeed follow this differentiated strategy?
Sikka: Yes I think that we can achieve a much higher value, new kinds of business models, new ways of delivering value and then capturing that value with the clients, new kinds of prepositions where we can share in the value that is delivered to the clients and so forth as well as in much higher productivity that we achieve with our employees by the use of technology.
Q: Let me ask you the question on margins because 100 bps growth as far as margins are concerned QoQ, have you been able to suck out everything that you could as far as utilisation is concerned? Utilisation rates are at the highest at 82 percent, is there room to able to do more there and you said that you don't anticipate margins moving significantly higher than that 25 percent band that you held out, but is there really room for further improvement there?
Bansal: There is always room for improvement in everything that we do and I am sure if we look across around the company there is scope for improvement in many areas. Having said that I think utilisation at 82.3 percent is what I had set out about five-six quarters back that I would want utilisation to be 80-82 percent and today we are there. So it gives us the confidence that if we set our eyes on something we will achieve it.
Q: So what is the next target that you are setting your eyes on?
Bansal: There is room for more but having said that we have challenges on the growth. We have been underperforming the industry and the leading players in the industry. Our first priority is to get back our growth, to exceed and sustain that growth and for that there has to be investments made into the business and we are making investments. So what we are doing is at one time we are looking at the cost carefully, we are cutting out all the costs which are unnecessary, which are not required for the growth of business and making investments back to the business.
Q: You have made significant gains there as far as your cost optimisation strategy is concerned which was one of the pillars of Narayana Murthy's revival plan. Do you believe enough has been done on that front or you think that you could perhaps see more advantages coming in from being able to squeeze costs further?
Bansal: There is never enough on cost optimisation, there is always opportunity for cost optimisation, there is automation, there is productivity benefit, there are many ways of looking at cost optimisation, but I believe that we have to look at cost optimisation on a continuous basis, at the same time look at opportunity for investment.
Q: Investment continues, cost optimisation continues but the impact of the kind of strategy that Vishal just articulated, the more differentiated innovative strategy that you are gunning for. Forget what happens as far as margins are concerned over the next two-three quarters but when can we start seeing that impact margins going forward?
Bansal: I think the impact of the margins will show up as Vishal said our aspirations continue to be in growth at industry trading growth at industry trading margins and if that is the thing the impact will show on the positive side of the margins.
As we start executing on the strategies, I think you will start seeing the numbers flow down on the margins too.
Q: So two-three years is that the time period that you are working with?
Bansal: I cannot work on a different timeline than Vishal; we have to work on the same timeline.
Q: In terms of attrition you have actually seen attrition rates go up despite some of the measures that the company has announced, now at about 20 percent. What can we anticipate in terms of attrition and also the reskilling that is going to be required for you to be able to capture on these new areas of opportunities, the digitisation piece and so on. What should we anticipate there and there has been a lot of rumours about Chief Technical Officer (CTO), Chief Innovation Officer (CIO) and so on and so forth, are we likely to see more changes as far as the management structure is concerned?
Rao: On attrition on last twelve months (LTM) basis it is 20.1 percent but when you look at it on a month-on-month basis attrition has actually come down. So it is trending down in the right direction so we are very confident that in the next two quarters we will get it back to where we want to be.
Q: Where do you want it to be in the next couple of quarters?
Rao: Historically it has always been around 12-14 percent and that is where we are comfortable with and that is where we would like to see in the next couple of quarters. Looking at all the things we are doing, in fact from April onwards we have already had about 12,000 plus promotions. We have done lot of things to fix the hygiene issues, now it is a softer factor in terms of engaging with employees better and with Vishal, the new strategy and a lot of things that we are doing on the engagement front, I am very confident that attrition should go down. It has started trending already when I look back from July through September even though it is 20.1 on LTM basis.
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Q: A quick take as far as your verticals are concerned, the different verticals are concerned and also the kind of growth that you anticipate specifically in the US market which continues to be on the uptrend but of course other markets like Europe looking a bit muted at this point in time?
Rao: Europe on a sequential basis we grew by about 4.4 percent or something, US was 3.1 percent so this quarter we have seen except in India we have seen good growth across all geographies.
USA from an optimism perspective we are seeing more optimism and it is more or less broad based and as I said earlier on retail and consumer packaged goods (CPG) we are seeing some softness and probably in the second half we may see some softness in the telecom sector.
Sikka: On your earlier question about the rescaling, this is an area that we are extremely focused on. We believe that this is at the heart of our company; it is at the heart of any company’s transformation and especially at Infosys where we value learning and education so much.
On my first day I went to Mysore to our incredible campus there. We are bringing in the ability to rescale to our education itself.
Q: I believe that is part of your 100 day plan for Infosys as well?
Sikka: Yes I am hoping to do a couple of classes myself that I can teach hopefully, but we are doing a massive embrace of AI, we are creating some AI classes, embedded systems, adaptive systems and so forth. We are doing classes on design thinking together with Stanford. We have already trained some of our trainers in these areas; we have taken some clients on these sessions. Also this rescaling we know that it is going to be at the heart of our renewal and therefore we are investing heavily in this.
Q: Are you looking at bringing in a CTO, a CIO and what is the real story as far as how many former SAP colleagues you have brought with you to Infosys because there are all kinds of numbers that are doing the rounds. We know of the few that have actually joined the organisation but I am not sure about the exact number.
Sikka: It is just a handful of colleagues. SAP is a distinguished partner, I have thousands of friends there and Infosys and SAP have a very deep partnership and we are looking to really take this partnership to a great level. I worked 12 years there so there is no such thing. It is just typical in the industry when you are a senior executive then there are lots of people you are close to and have chemistry with. So a handful of people have joined us and one of those is Dr. Navin Budhiraja who used to be at Success Factor, a company that SAP has acquired. He left SAP sometime ago and when I joined Infosys he asked me if he could come and join and he is our chief architect, he is helping us with our platform strategy and so forth. So there are some people like this.
Q: Are you looking at adding more roles as far as the senior management is concerned?
Sikka: I am very comfortable with our management team for now, I think that we had a great chemistry working in this quarter; this was my first quarter working together. We have a great dynamic young team and of course we make changes that are necessary.
Q: The clients that you are talking to; the BP deal has been a big win as far as Infosys is concerned. Can we anticipate more such deal wins for you?
Sikka: Absolutely, we have bided six or seven large deals in this quarter to the tune of about USD 600 million total contract value (TCV), five were in the US and in many different industries so for sure you should look for that.
Q: What is going to be the strategy to deal with the currency volatility that you have clearly articulated?
Bansal: On cross currencies you cannot do much because the translation would show up on the topline for all the companies, but on rupee, we expect the rupee to be in the narrow band of 60-62/USD and our hedging strategy continues to be short-term. It has worked very well for us in the past and I am sure it will work very well for us in the future too.
Q: Are you likely to be a more aggressive Infosys Vishal Sikka? Are you going to lead a more aggressive Infosys or is Infosys going to continue to be more conservative as has been the norm?
Sikka: I don’t know about aggressive but a passionate Infosys, a very responsive Infosys, an agile Infosys, a dynamic Infosys that is hungry for growth and excellence, absolutely.
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