With Salil Parekh at helm, stability back at Infosys; next move awaited

As CEO Salil Parekh gets ready to announce Infosys’ first annual results under his leadership, all eyes are on the next set of priorities of India’s second largest IT services firm. While growth of the Bengaluru-based firm was largely addressed by the current management in the first nine months of the last financial year, it is profitability that investors are more worried about, analysts and industry experts said.

With Parekh at the helm since January last year, Infosys was able to clock strong revenue growth in the first nine months of FY19, largely supported by large deals. The aggregate value of large deals stood at $4.7 billion in the April-December period of FY19 out of which $2 billion of orders were clinched in the July-September quarter and $1.57 billion worth of contracts came in the December quarter from marquee clients such as Microsoft and Verizon among others. Such deal wins prom­pted Infosys in January to revise its revenue guidance to 8.5-9 per cent for FY19, up from 6-8 per cent earlier. However, it stuck to its earlier operating margin guidance of 22-24 per cent for FY19. The company's margin forecast for FY18 was in the 23-25 per cent range.

“Direction-wise, the only concern of investors is whether the business is getting more commoditised, which has an impact on margins. Last fiscal year, Infosys had reduced the margin range. So the markets are worried whether they would bring it down further," said V Balakrishnan, former Infosys board member and chairman of Exfinity Venture Partners. “So, it is important for him (Salil Parekh) to guide properly, failing which it would send a negative signal.”

Some analysts also said that while rebadging of clients' employees and entering into joint ventures with entities for winning business would boost revenue, Infosys might have to compromise on margins in the near term. “Under Parekh's leadership, we have seen a lot of aggression from Infosys in large deals and in the joint venture space. But higher subcontracting costs and rising onshore expenditure, apart from buying out resources from clients for winning business, are margin dilutive," said Pareekh Jain of Pareekh Consulting.   Infosys has been aggressively tapping the joint venture route under Parekh in its bid to win contracts from large clients. As part of this initiative, it said last week that it will acquire a 75 per cent stake in Dutch-based ABN AMRO Bank's arm, Stater NV, for $143.15 million. 

Similarly, the firm formed similar joint ventures with Hitachi, Panasonic, and Pasona in Japan last year and also entering into partnership with Singapore's state fund Temasek. Infosys invested around $35 million for buying out stakes in these joint venture entities. As part of a $700 million outsourcing deal, it also absorbed close to 2,500 employees of Verizon. 

Against this backdrop, Motilal Oswal and Nomura have come up with reports saying that Infosys is likely to cut its operating margin guidance for FY20. While Nomura has pegged it in the 21-23 per cent range, Motilal Oswal sees it at between 21.5- 23 per cent during the next fiscal year.  

However, Parekh has clarified that Infosys will not compromise on margins in its pursuit of growth. “We are very clear that we are targeting high margin business. We are never going to sacrifice margin for growth or for anything.”

While the markets await its Q4 announcement scheduled for April 12, many industry watchers said commentary on BFSI and retail would also be critical for gauging the sustainability of its growth. 

“Unlike his predecessor Vishal Sikka, Salil Parekh has put the focus back on the services side of the business and has also stabilised Infosys' operations, despite a few high profile exits. But it is now to be seen whether he is able to give the firm the strategic direction for its next phase of growth," said Jain.