Infosys Q2 results: Sikka's buying time, big turnaround not in sight yet

The Infosys second quarter results announced today (10 October), the first full-quarter performance report under new CEO Vishal Sikka, should be seen less as an indicator of company’s improving fortunes and more as an effort to ask stakeholders to keep the faith.

The numbers are fine, having beaten the street’s expectations marginally with 3.1 percent dollar revenue growth quarter-on-quarter to $2.1 billion, and six percent on net profits growth to $511 million. Companies like Infosys, which earn in dollars, should always be evaluated in dollars. The rupee results are largely a function of the exchange rate - which has been wayward for the last couple of years, and throw no light on the company’s real performance.

This is simple to illustrate with just the two main numbers: while the dollar revenue growth quarter-on-quarter (ie, July-September over April-June) shows 3.1 percent, the rupee equivalent is 4.5 percent, one-and-a-half times more. The net profit growth in dollar and rupee shows a lower degree of divergence, at 6 percent and 7.3 percent.

To really figure out whether Sikka has made a huge difference to Infosys’s fortunes or not one will have to wait several quarters before arriving at conclusions.

However, what needs noting is what Sikka is trying to do. One should, therefore, focus less on the immediate results, and more on the big picture.

What Sikka seems to be doing is - as stated earlier - seeking the buy-in of all his stakeholders, employees, shareholders and customers. All have been lukewarm to the company for the last three years or more.

In August, Sikka approved mass promotions for over 5,000 Infosys staffers after the company suffered a worrying increase in its attrition rate of from 16.9 percent to 19.5 percent between the last quarter of 2013-14 and the first quarter of 2014-15. In the second quarter (ended September 2014), the rate has crossed 20 percent. This means Infosys is still losing one out of every five employees it has on its rolls. We don’t know if the worst is over, or there is more to come. Sikka is trying to slow down the process of attrition and loss of employee confidence in the company. Infosys lost several senior executives - a dozen of them - during the time NR Narayana Murthy had been at the helm in his second innings, and the odd top-level exit continued under Sikka too.

Sikka is clearly trying to stem the rot, though one must add that this policy (increments and promotions) was started under Murthy when he rejoined Infosys last year to put it back on rails. As we noted earlier, “within weeks of his return, Infosys increased the salaries of its employees in India for 2013-14 by an average 8 percent.” Some 10,000 employees received promotions this February under Murthy.

While employee morale may take a while to fix, given the opportunities for high fliers in the world of tech, Sikka is now trying to woo his second constituency: investors.

Investors have been positive on Infosys after the return or Murthy and the appointment of Sikka, and in the results announcement, Sikka bought himself more goodwill by announcing a 1:1 bonus issue and a Rs 30-per-share interim dividend for shareholders. The share price responded, and, at the time of writing it was up by nearly 7 percent over the previous closing.

Paying all this out and servicing the bonus issue will not be a problem as the company has cash or cash equivalents of $5.444 billion (Rs 29,748 crore).

What the results show is that nothing fundamental has changed as yet for Infosys, as is evident even from the official statements put out by the company. While Sikka talked about how digital transformation is a “great opportunity” for Infosys, his Chief Operating Officer (UB Pravin Kumar) talked about efforts to improve operational efficiencies yielding “encouraging results.” CFO Rajiv Bansal said “we have been able to “improve our margins during the quarter and feel confident of sustaining these within a narrow band.”

All these are standard statements from the top, but nothing to indicate a new growth path has been achieved as yet. It is all about potential and hope.

Evidence of an actual turnaround will come from two indicators: how and where the company deploys its cash hoard; and the shape of revenue growth. There is no hockey stick graph visible on this front yet.