Big-bang Q1: Sikka magic may be helping Infosys break away from past troubles

After the first-quarter earnings of Infosys, nay-sayers may have to sit up and take notice because there are signs that the company is finally turning around many quarters of poor show. The company reported a 5 percent increase in quarterly net profit, bolstered by a surge in demand for IT outsourcing services from clients in the United States, its biggest market. Its net profit stood at Rs 3,030 crore in the June quarter, up from Rs 2,886 crore a year ago. This was better than many analysts estimates. Consolidated revenue for the quarter was up 12.4 percent to Rs 14,354 crore, from Rs 12,770 crore in April-June, 2014. The company also said it expects revenue to grow 7.2-9.2 percent in dollar terms, lower that industry body Nasscom’s estimates for the sector at 14-16 percent. Infosys sees its revenue growing 11.5-13.5 percent in rupee terms. [caption id=“attachment_2355974” align=“alignleft” width=“380”] Reuters[/caption] Do the numbers mean that the company is breaking away from its troubled past, when it was going through a transition? There are reasons to believe so and here are they: Beginning of the turnaround: The quarter marks the beginning of a turnaround. According to Sikka, the numbers show that the company’s operational focus and adoption of innovation and new technologies are “starting to show results”. “While we are still early in our journey to become the next-generation services company, this gives us a good momentum for rest of the year,” he said at a press conference. Borkerages are in sync with this view too. For one, Credit Suisse has said the numbers “signal at least for now that the turnaround is on the right track”. Ankur Rudra of CLSA concurs lauding the 4.5% on-quarter dollar revenue growth, strong client additions and deal wins. “Strong growth across verticals and service lines indicate a business in full-fledged recovery. Strong growth in AM (application maintenance), IMS (infrastructure maintenance services), testing indicates participation in commoditised deals that Infosys was missing out on earlier,” Rudra was quoted as saying in a Times of India report . And that is more than enough a reason to believe that Sikka magic is beginning to work for the company. Client mining: This is one area where Sikka’s strategy is clearly working. After taking over the reins, he had set up a group of executives under him to engage with 15 large clients . In an investor conference in New York, Sikka had said the team will monitor the top three clients from each of the five verticals. The move would enable the company “to better mine (clients), connect the dots, create a lot of agility around new opportunities as well as arrest decline in existing opportunities,” he had said. That this is paying off is clear as a report in the Mint newspaper notes “for the first time in five years, the 10 biggest clients of Infosys outsourced more work to the company.” Revenue from Bank of America, its largest client, topped $300 million. What has worked wonders is Sikka’s exhortation to the staff to adopt design thinking thinking creatively to bring about solutions to business problems. The company has added 79 clients during the quarter under review. Now, it has a total of 987 clients. The contract wins included a multi-year contract from a major German bank for application maintenance services, digital and mobility services, package implementation, and testing services. The ‘design thinking’ seems to have helped bring about a change in client engagements. The strategies are likely to pay higher dividend once the recovery in the US economy takes concrete shape. Attrition: This has been a nightmare for Infosys. The company has managed to control this. Quarterly annualised attrition for stood at 14.2% compared with 23.4 percent in the year-ago quarter. However, on quarter this is an increase from 13.4%. As the management clarified in the press conference, traditionally employee churn is higher in the first quarter. So the on-quarter should not be a big worry. The management expects the rate to decline a further 200 basis points going ahead. What has lead to the improvement is the various measures undertaken by Sikka to boost the staff morale. Interestingly, it has to be noted that at larger rival TCS, employees are leaving in droves. Beating TCS: Attrition is not the only metrics where Infosys has beaten TCS. There are others like revenue growth and volume growth. While Infosys reported a 4.5% on-quarter growth in dollar revenue to $2.2 billion, TCS’s had risen 3.5%. As far as volumes are concerned, Infosys’ growth was 5.4% and and TCS’ 4.8%. Credit Suisse notes that based on consensus earnings, Infosys’ discount to TCS is now only about 9% on FY16 earnings. “For further relative outperformance and for growth rates (LTM) to consistency would be required, in our view,” it said, adding “While both TCS and Infosys now have rich valuations, our relative preference remains with TCS—It is growing at a higher rate with higher margins, off a larger base, and has relatively underperformed this year as well.” Earlier, TCS had reported a 3 percent on-quarter fall in profit after tax to Rs 5,709 crore and 6 percent rise in revenue to Rs 25,668.11 crore. Share price: And after many quarters, investors had something to cheer about and they indeed celebrated. The Infosys stock closed 11 percent up at Rs 1112.65. It overtook ITC and ONGC to become the fifth most valued on the BSE . Intra-day, the stock had risen 15 percent adding 37,000 crore to investor wealth. The BSE IT index rose 4.5 percent. (Editor’s note: The story has been updated to add TCS numbers after a reader comment)