Infosys will continue its focus on delivering high operating margins in the tech services business, said its new chief executive officer Vishal Sikka.
The Bangalore company's operating margins, a ratio of operating profits to revenues, was a healthy 25.1 per cent in the April-June quarter, the result of sustained efforts by the company to trim costs in the last 12 months.
Ranked No. 3 by revenues among Indian software services providers, Infosys has been panned in the past for what some see as its obsessive focus on maintaining profitability even if it means losing new contracts. Some analysts have argued that the company's stance comes in the way of hiring sales specialists and domain experts, who in turn can win big deals for it and keep its growth rate high.
Bigger rivals Tata Consultancy Services and Cognizant Technology Solutions have accelerated revenues often by accepting assignments with lower profitability. In mid-2012, Cognizant overtook Infosys in terms of quarterly revenues.
"We have a healthy focus on operating margins," Sikka, 47, said at a meeting with journalists in Bangalore mid-day on Friday. "We see no reason to change the aspirations on margins."
Friday was Sikka's first day at work as Infosys's CEO. Formerly the chief technology officer of business software firm SAP AG, he takes the helm of a company that was once considered the bellwether of the tech services industry. Some of the shine has worn off over slow-growing revenues, several exits at the top level, and high levels of overall attrition in the company.
Later on Friday afternoon, a senior executive said the company had told analysts that Infosys can deliver 25-26 per cent operating margins over the "medium and long term but perhaps not on a short-term basis".
"If we find a project with a good RoI [return on investment] and find it will pay back in a year or so, we will go ahead with it. Even if it means, there's a hit taken in the immediate quarter," the executive said. He did not want to be named.
Infosys, which expects dollar revenues in 2014/15 to grow seven to nine per cent, reported a net profit of Rs 2,886 crore in the June quarter. Though this was a drop of 3.5 per cent from profits in the preceding January-March quarter, the numbers were in line with expectations of stock analysts.
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Sikka was clear about the strategy he's laying out for Infosys. Eager to drive home the point that he had no intentions of transforming Infosys into a products company - expectations of which arise because of his background in SAP - Sikka said he expected the services business of the company to grow. But it would be augmented by use of product-like offerings and re-usable intellectual property (IP).
"Growth will have to come from re-use of IP. Non-linear growth comes from use of IP and software as a service [Saas] across clients and deployments. But that does not necessarily mean of us becoming a products company," he insisted.
Infosys plans to actively use a $100 million fund it had announced two quarters ago to nurture start-ups and projects that lead to such IP, the CEO, who grew up in Vadodara (then Baroda), added.
Responding to a question on how Infosys's "sales engine" had not performed in the recent past, chief operating officer U. B. Pravin Rao said the company was beefing up its sales teams. "There are two things we didn't do well: our share of large deals won and not mining our existing accounts well," Rao said. "On the second front, we are... strengthening the sales engine to mine accounts better." Mining accounts in tech services sales jargon refers to selling more to an existing client.
Sikka, who drew his tech roots to a railway-engineer father, said he was delighted with the technology expertise at Infosys. One of his first priorities, he added, was restoring confidence among the 160,000-and-off workforce at the company. "We need to get a sense of confidence in the company. The mindset in the company earlier was "we can do anything". The confidence will come from "we can learn anything"," he said.
The new Infosys CEO, who will be based in California in the United States, said he didn't worry about a cultural gap between him, a professional who left India two-and-a-half decades ago, and the rest of Infosys. "The India today is very different from the India I grew up in. So, in many ways [at Infosys] I am a complete stranger. But in other ways, there is an incredible, almost spiritual alignment of values."
When asked if, like other leaders, he had a fallback plan if his ambitions for Infosys didn't bear fruit, Sikka took a few moments to respond. "There is no Plan B. We deeply believe in what we're doing. Time will tell whether we'll succeed or not."
Shares of Infosys ended trading Friday at Rs 3,340.35 each, down 0.75 per cent in an overall market that, measured by the Bombay Stock Exchange Sensitive Index, shed 1.6 per cent.