New Infosys CEO Salil Parekh starts stint with in-line Q3 numbers

Co-founder Nandan Nilekani set the tone for Salil Parekh, , saying stability had returned to the company

Infosys Technologies met Street expectations by reporting 38.3 per cent year-on-year growth in third quarter profits to Rs 51.29 billion, aided by a one-time gain from a US tax reversal. Revenues of the Bengaluru-headquartered company at Rs 177.9 billion grew 6.5 per cent, on the back of improved staff utilisation and higher growth from digital deals, in a traditionally weak quarter ending December 31.

On Wednesday, the firm reported a one-time gain of Rs 14.32 billion due to tax reversals after it signed an Advance Pricing Agreement (APA) with the US Internal Revenue Service (IRS), which reflected in the rise in profit. Revenue in dollar terms grew 0.8 per cent over the previous quarter, slower than larger peer Tata Consultancy Services in the same period, which grew 1.3 per cent.

Co-founder Nandan Nilekani set the tone for Salil S Parekh, who took over as managing director and chief executive (second non-founder in the top post) on January 2, saying stability had returned to the company. And, that Parekh would review the strategy set by former chief executive Vishal Sikka and draw his plans by April.

A stable management returns at Infosys in a tumultuous year that saw Sikka's exit after a public spat with founder N R Narayana Murthy. To indicate this, Infosys maintained it would end the financial year with growth of 5.5 to 6.5 per cent in revenue, in constant currency.

"It is absolutely stable. We have had a strong performance in a tough quarter," said Nilekani. Analysts tracking company and sector say the company's commentary for the year ahead is positive.

Infosys CEO Salil Parekh with co-founder and non-executive chairman Nandan Nilekani (Photo: Saggere Radhakrishna)

"The results in the quarter were largely in line with volume growth of 1.6 per cent. Operating margin improved by 10 bps during the quarter at 24.3 per cent, ahead of expectations. Adjusted PAT (profit after tax) is in line at Rs 36.9 bn (down 0.8 per cent, quarter-on-quarter). Management commentary remained confident as it expects the demand environment to improve, with more discretionary spend allocations in key verticals in CY18," wrote analysts at Emkay Research. "We believe the results are broadly in line and would now look forward to the new CEO's commentary on the strategic road map."

Parekh is evaluating the strategy set by Sikka that was reviewed by Nilekani, based on four pillars of market opportunities, client relationship, people and rejuvenation of the service portfolio. The former Capgemini executive comes with strong consulting and digital expertise. He's said he would continue with solutions such as Nia, the artificial intelligence platform that had strong traction with customers, when he presents his strategy for the company in April.

"There was no expectation (from the founders) for me," said Parekh, who highlighted the focus for the three months to April would be to achieve the set revenue target for the year. "This is a phenomenal company, started by people who have tremendous vision. They had created something which will last a very long time. Everything that I have seen in this company reconfirms that, and my hope and expectations would be to reconnect with the founders, the original people who started the company, and pay respect to them in that light."

In the quarter, Infosys saw business from banking and financial service clients get slower due to the uncertain environment, similar to what TCS witnessed. It said business from Europe was growing and expected the US market to revive.

"As in the case of TCS, they said Europe is looking good and there is an expectation for the US to pick up. Can't say their stand on banking and financial services (BFS) differs much from TCS, although one would have expected better guidance for the coming year," said Ravi Menon, analyst at brokerage Ellara Capital. "India and the Rest of the World results are not worrisome for now but if they continue to be so, that would be a concern."

Infosys continued to see pricing pressure on traditional services, which slowed in the quarter, offset by the 6.5 per cent growth in the newer digital services, which contribute 25 per cent to its revenue. It had its highest staff utilisation of 84.9 per cent, which helped in improving margins by 10 basis points to 24.3 per cent.

Rajesh Krishnamurthy, a 23-year veteran of Infosys and who led the European business, the consulting arm and energy, utilities, telecommunications and services, quit the company, citing personal reasons.