Infosys under Sikka: Stock races ahead of peers, deal wins gather pace

Though its financial performance has improved, growth in new segments needs to accelerate

Amid Infosys founders’ concerns over corporate governance and the salary of Vishal Sikka, the CEO, a look at the company’s performance ever since Sikka took charge on August 1, 2014, throws up interesting insights. Infosys’ stock price has ticked up 7.5 per cent since August 2014, outpacing peers such as Tata Consultancy Services (TCS) and Wipro. Stocks of these companies have fallen 4.1 per cent and 17 per cent, respectively, in this period. Continued improvement in deal wins and relatively more positive commentary from Infosys management are reasons behind this outperformance. On the other hand, larger peer TCS’ revenue growth missed Street estimates as select verticals remained under pressure. TCS’ relatively higher valuations too weighed on its stock price in this period. Wipro, on the other hand, has been lagging its peers in revenue growth for many quarters now and will remain under pressure till this trend changes.
 
Operationally, Infosys’ financial performance has improved since Sikka took charge, both on an absolute basis as well as when compared to peers. In fact, Infosys was the fastest growing company organically in FY17 in constant currency terms. Its revenue growth guidance of 8.4 to 8.8 per cent in constant currency terms, though toned down, is still quite healthy. Its Ebitda margins, too, have remained in a narrow band of 31 to 32 per cent over the past few quarters.

 

Shashi Bhusan, IT analyst at IDFC Securities, says, “Infosys has definitely seen improvement in revenue growth momentum. There is considerable acceleration in deal closure over the last nine months. Plus, the client specific issues have been addressed and no competitor has taken business away from Infosys.” And this has come at a time when Indian IT companies have been going through rough weather in recent years as they align their business models away from the traditional businesses towards new growth engines in digital technology such as cloud, data analytics, Internet of Things and automation, among others. The sector has also witnessed cyclical headwinds such as Brexit (could impact demand from the UK, Europe) as well as rising protectionism in its largest market, the US. In this context, Infosys’ guidance appears fairly reasonable. Most analysts have given a thumbs up to Sikka’s strategies as well as performance so far.
 
Ravi Menon, IT analyst at Elara Capital, says, “We think that the founders should not have a problem with either Sikka’s compensation or his strategy. During the short time since Sikka joined, he has been key in creating value for customers — customer satisfaction rates have reportedly improved and barring the contract cancellation relating to RBS having to shelve its planned spin-off of Williams & Glyn, Infosys has not lost any major projects.” For firms as large as Infosys, the results of any strategy will be evident only 3-5 years from the time it is implemented, he adds.
 
Though Infosys’ fundamentals have improved in Sikka’s reign so far, the company needs to do a lot more to regain its lost glory and successfully weather the cyclical and structural storms facing the sector. Its newer segments such as big data and analytics platforms must witness improved traction and be a growth engine. Currently, most clients are testing the proof of concept for these platforms. Sustained improvement in these will help Infosys reach the next level.
 
For now, most analysts believe Infosys could post similar revenue growth and margins in FY18 as seen in the current financial year so far.
 
Amid rising pressure from the investor community to put its mammoth cash to efficient use, most analysts are hopeful the company could announce a buyback and/or higher dividends sooner than later. Reduction of cash in its books would also push up Infosys’ return ratios.
 
Though margin pressure will continue given ongoing weakness in pricing and potentially higher costs towards visas, rising contribution from newer segments such as automation could provide some offset. Notably, the increase in these businesses is a key monitorable and could happen at a gradual pace. Any cyclical uptick in demand from US financial services companies could be a key positive. Acquisition of good companies could also go a long way in aiding Infosys’ revenue growth. However, the new management too continues to be conservative on this front. Infosys scrip currently trades at reasonable valuations of 13 times FY18 estimated earnings.
 
While the founders are reportedly concerned about Sikka’s compensation, some analysts find it justified. “Sikka is based in Palo Alto, one of the most expensive parts in the world to work from. Considering that, and what CEOs of even much smaller firms based in Palo Alto are paid, his remuneration seems reasonable. It seems even modest considering that bulk of it is accounted for by stock options that vest over a fairly long period,” adds Menon of Elara.
 
Overall, though Infosys’ strategies are in the right direction and execution has been strong so far, there is more work cut out for Team Sikka.

 

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