Madhuchanda Dey Moneycontrol Research
Infosys had started the year with a bang. Just when things were looking up, not only with the fundamentals but with the added sweetener of a buyback, Vishal Sikka’s exit as CEO is a big dampener. The company loses the leadership of a man who “got it” and the future is shrouded in uncertainty because the promoters have emerged as an alternate power centre who could discomfit any incoming CEO.
Whether this is a particularly unpleasant hiccup for the Infy stock or the beginning of the end will depend on how well the company’s board has understood the Sikka mantra and the kind of individual they get as a replacement.
Great start to the year
Infosys delivered a solid set of numbers for the quarter ended June 30. Growth had made a comeback with the revenue growing by 2.7 percent in Constant Currency (CC) terms and 3.2 percent in US dollar. What was especially heartening was the performance on the pricing front that was up 0.6 percent onsite and 1.9 percent offshore with the blended pricing rising by 1.8 percent. The company guided to CC growth guidance of 6.5-8.5 percent for FY18. Despite the pending wage hike in Q2 FY18, management guided to a margin band of 23 - 25 percent.
Also Read: Narayana Murthy hits back at Infosys board: Here's the complete statement
Amid the several green shoots including the traction in new service lines, there was a niggling worry. We had highlighted in our earlier note that
“The entire IT (information technology) sector is undergoing this transformation and interestingly there will be an inflection point where the upward movement of the new services/verticals will overpower the old. While it is difficult to put a timeline to the same, it will certainly happen in the next three to five years. IT sector will emerge in a new avatar and will be re-rated once again.
However, there will be few survivors in the transition. We feel Infosys under Dr.Sikka will be one of the survivors and the new Infosys will be remarkably different in its character and offering. For long-term investors the continuity of Dr Sikka (in light of the reported differences with the founders) remain a key investment risk.”
The investment risk has played out too early.
Why was Sikka so important?
For one, he was early in understanding the tectonic shift in the IT landscape. The software-plus service model of the company was gaining traction and new services and the company-wide adoption of automation was improving productivity per employees.
Infosys had embarked on the correct path of transformation to be a “future ready” business and realised that eventually the so called legacy/commoditised services will all get morphed into the new services.
The new leadership had launched more than 25 new services These services included Cloud Ecosystem, Big Data and Analytics, API and Micro services, Data and Mainframe Modernization, Cyber Security and IoT Engineering Services. Their share was close to 10% of revenue in the June 2017 quarter and the management mentioned that nearly 50% of the incremental revenue in the past two years came from the new services.
Infosys launched breakthrough new programs to drive innovation, education and entrepreneurship on a large scale like Zero Distance, a program to drive grassroots innovation; Design Thinking training, to drive creative confidence and problem-finding and Zero Bench, to leverage the bench as a means to drive additional value for clients.
Under Sikka’s leadership, Infosys developed and launched its artificial intelligence platform Nia, and already has more than 160 artificial intelligence scenarios deployed with more than 70 clients.
Also Read: Sikka’s exit causes ‘Vishal’ hole of almost Rs 1,000 crore in Murthy’s portfolio
Why is AI important?
AI (artificial intelligence), which is basically a mimicking of human capabilities, is likely to impact IT players in both efficiency and growth.
Efficiency in the sense that all the major IT service players will have to deploy AI to enable more efficient running and management of both their own and client IT infrastructure and resources. AI used for internal efficiency will be the next must-have capability to compete in the new landscape, just as low-cost offshore resources was the differentiator between success and failure in the recent past. Without AI, companies will not have the cost base to compete. There will be huge business opportunities for those players who develop a deep understanding of AI, have the relevant partnerships in place and have the ability to hand-hold clients as they navigate the AI ecosystem.
It is clear that in the midst of the transformation, success will be determined by consulting skills, the board and CXO relationships and understanding of the technology and investments made in building the AI partnership eco-system.
Since competitive advantage has moved away from the ability to deploy low-cost human resources towards an understanding of the new digital technologies and their business application, Indian players have been caught off-guard. A solid understanding and use of new technologies coupled with accelerated investment in new technologies is the need of the hour.
Also Read: Vishal Sikka resigns as Infosys CEO & MD with immediate effect
Investors had reposed faith in Vishal Sikka to navigate the tumultuous ride. As the saying goes “nobody is indispensable”. So a leadership change is a hiccup and not the end for Infosys – provided the board appreciates that the technological change in IT is indispensable and finds a successor who can drive this company to the next level. From Sikka’s standpoint it will be an unfinished agenda that had great promise and for the shareholders it will be a future full of uncertainty.
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