Stock Market

There is scope for increasing guidance as visibility improves: Vishal Sikka

Talking about the company’s fourth quarter performance, guidance and business outlook going forward Vishal Sikka, MD and CEO, Infosys said the company in FY18 expects to beat the seasonal softness that is seen in Q3 and Q4.

Infosys Thursday reported a muted set of number for the fourth quarter FY17. The consolidated profit saw de-growth of 2.8 percent at Rs 3,603 crore for the January-March quarter from Rs 3,708 crore in previous quarter. Revenue also fell 0.88 percent to Rs 17,120 crore on sequential basis.

The company also missed its dollar revenue guidance. It expects its FY18 constant currency dollar revenue growth at 6.5-8.5 percent, which was lower than analysts’ forecast of 7-9 percent.

Sikka said, the dollar revenue guidance was based on the visibility seen right now but going forward there is scope for increasing it as visibility improves.

“Will attain better visibility with every quarter going ahead,” he said.

Talking about his aspirational target of USD 20 billion revenues by 2020, he said it looks exceedingly difficult to meet that but would achieve that later.

The focus of investment in the current fiscal will be on local hiring (US), training and delivery centres.

In the same interview, CNBC-TV18 also spoke to Infosys’ COO Pravin Rao and CFO MD Ranganath.

Below is the verbatim transcript of their interview

Q: Can you talk about growth guidance?

Sikka: We want to give guidance based on what we see and one of the analyst came up with this phrase ‘saying it like you see it’ and this is what we do. Of course we have learnt from the past, the last several quarters, but this is basically what we see presently, one of the things that the quarter four performance did was obviously had an impact on this so as our visibility improves obviously I expect there is scope for doing better and in particular as the software as a service offering and the new offerings continue to kick in later on then I expect that we will be able to beat that Q3 and Q4 traditional depression that we have, the seasonal weakness that we will be able to overcome that better in the coming year and so forth. But, based on everything that we see right now it is 6.5-8.5 percent.

Q: Is it fair even to say that by the second half of the year you will get better visibility?

Sikka: Of course, yes, with every quarter we should get better visibility.

Q: As far as the aspiration target (USD 20 billion by 2020) is concerned, how realistic is it right now?

Sikka: It is exceedingly difficult obviously under the circumstances there is no doubt, so the way I look at this is I mean I set that as an aspiration when I started in October of that year and we have had in the company and in the industry similar aspirational goals and ambitions that people have set at various times and these are not financial goals these are aspirations.

Therefore, obviously, it is an exceedingly difficult target to achieve and I used to joke that what good it is if it is not a difficult one. Now it even gets steeper as the time goes by. But the main point there as I mentioned earlier is that a strong revenue growth purposefully with strong margins and especially with higher revenue per employee.

We are making progress on all three fronts. We have a consistent focus on margins and we have improved on revenue per employee despite the environment that we have seen. So, as software becomes a bigger part of our work, as innovation becomes a bigger part of our work these numbers will continue to improve.

Q: Will you revise this target then?

Sikka: It is not a target it is an aspiration. Okay, let us say sometime after 2020, but I am sticking to USD 20 billion and 30 percent because that is a right way to think about our future. It puts the strategy into a nice quantitative nutshell.

Q: Realistically, speaking what are the pressure points that are there from a rupee volatility to the visa concerns to the uncertainty after Trump administration? You have been speaking to multiple law makers, you been speaking to policy makers, US clients, in the US BFSI space for instances have clients hit the pause button? What is the issue with respect to actually seeing an increase in IT spending?

Sikka: I think that it is more and more focused on innovation, more and more focused on improving the businesses ability to become competitive. With the new administration that is our strong focus and in terms of the visa we should always bring a lot of local talent that is a healthy way to function anywhere. Bring local talent, bring the best of global talent and best of technology. Certainly, over dependant on visa is anywhere a bad thing and we have been working on over the last two and a half years on ensuring that we don’t have so much dependence on visa.

Now obviously with regulations this becomes even more of an imperative so some of the investments that we were making in the course of this year are going to be about local hiring, local delivery centres and local training which is one that I am especially proud of is to establish local facilities to train people in the United States and so on.

Q: Is it safe to say that US clients have hit the pause button right now?

Sikka: No, they want to understand what the implications of the visa regulations are and things of this nature, but it is not a pause button. The times ahead are the main concern that reflects in the administration, Brexit and all of this. It is a very deep rooted concern about the future of employment, about the future of work. It is the same concern here in India, 60 percent of Indian engineering guys don’t have jobs. It is the same concern at Infosys these are at different scales and at different levels. But, when I think about my endeavour to transform the company towards automation centric and innovation centric company it is in the end all about the same underlying issue that we face globally which is that are there enough purposeful good kind of jobs, is technology really making us obsolete.

I see a future where people have to transform themselves into becoming more entrepreneurial, into becoming more of problem finders and developing Artificial Intelligence (AI). The AI technology is not falling from the skies. People are building it, people can learn to build it. I studied AI when I was student and my PhD is in AI. We have been teaching here at a massive scale at Infosys AI and I met the Prime Minister recently and I mentioned the same thing to him that we have to create a culture where millions of people become experts in these technologies, they become entrepreneurial. I think that is an essential part of the future is about whether it is about Infosys or India or the world around us.

Q: I know it has been distracting difficult few months for you. What lies ahead? Mr Venkatesan has come in on the board as Co-Chairman. What will his role be in terms of defining company policies, CSR policies, the role forward and are there any more changes that we can expect in the board functioning?

Sikka: I have no idea whether to make such changes or not. It has been distracting environment, no doubt. Already between the general environment that we are operating the company in as well as all the regulatory geopolitical aspects and so forth it is challenging enough situation and on top of that all these distractions definitely do not help but that is the environment in which we have to do our thing, in which we have to do our job. The board’s job is governance.

Ravi and the entire board, we have had a tremendous working relationship. The board’s job is governance and our job is to develop the strategy, to execute the strategy, to do the operations of the company and there is a very clear separation. We have a very committed board which works very hard. So I am looking forward to more of that.

Q: Had it affected your morale in any way? Given the fact that there have been so many questions?

Sikka: No. It is just distracting. Your endeavour is to ensure that you continue to guide the company, to lead the company and to transform the company in that environment but it doesn’t.

Q: In the last few months there have been multiple reports, multiple speculations. So I want to take this opportunity to put that to rest once and for all – there is no plan of Vishal Sikka moving on from Infosys. You are here to stay?

Sikka: I look at the faces of Infosian around me and the hope that they feel as well as the aspiration and yet the trepidation that they feel at times ahead and the smile on their face makes it alright.

Q: Can you tell us about the new capital allocation policy and the timeline for the same?

Ranganath: Today we have a policy of pay up to 50 percent profit after tax as dividends which is replaced by up to 70 percent of free cash flow by way of combination of dividend and/or buyback. The second piece that the board has also approved is that out of the current cash on the balance sheet of close to USD 6 billion, up to USD 2 billion, which is roughly about 34 percent, up to 34 percent is planned to be returned in fiscal 2018 subject to various regulatory and other things.

Also, they have given the mechanisms as either dividend or share back or combination of those. As you know, we are listed in multiple global stock exchanges, whether it is New York, whether it is Paris Euro Next as well as London and India of course, so, the exact mechanism — and we have to kind of comply with all the regulatory requirements, the exact mechanism will be based on all the regulatory compliances and approval. So, that is why the board has said the mechanisms, both are possible.

However, one thing is clear, the timeline that the board has specified is clearly FY18 and the quantum is up to USD 2 billion which is roughly up to 34 percent of the balance sheet cash.

Q: Does this change the mix in terms of your ability to aggressively look at acquisitions?

Rao: I don’t think so. We have factored all our — both from operational perspective as well as from a strategic perspective our cash needs over the next three to five years before coming with the capital allocation policy. So, I don’t think this will have any impact on the acquisition front. Our ability to acquire the right companies in order to accelerate the capability, I don’t think it will have an impact.

Ranganath: As Pravin rightly said, if you look at this particular year, we generated free cash flow of close to USD 1.7 billion. After dividend, etc. roughly if you look at a set pattern over the next couple of years, approximately about 500-550 we will still be accruing.

Q: As far as the vertical mix is concerned, there have been pressure points in hi-tech. BFSI has in general been a volatile space over the last few quarters itself. What is the visibility now, which are the sectors or verticals that you will be cautious about in FY18 which could be problem or pressure areas?

Rao: BFSI just to correct, BFSI has always been at least in the last few quarters it has been the growth engine for us. If you look at overall Infosys growth, good percentage contribution has come from BFSI. We continue to be fairly positive about BFSI. Even in this quarter, on a constant currency basis it grew 4.5 percent and for the year if you ignore Finacle, BFSI actually grew double digit. So, we are fairly optimistic about it.

From the vertical perspective, retail is one area where we are seeing challenges. There is a lot of softness there, there is a lot of disruption happening. In fact last calendar year, 2017 we have seen the record number of store closers, layoffs in the department stores and so on, so, retail is clearly in trouble times. So, we will expect volatility.

Q: How long will that remain, retail volatility?

Rao: That will continue at least in the coming year. It is difficult to predict but we will expect some volatility there. They are investing in transforming themselves and so on, but it is a very painful transition and so it may take some time. On the core manufacturing, we are doing well — industrials, aerospace, auto and other things but hi-tech is not doing well. Again, it is a structural issue.

On the other hand, Consumer Packaged Goods (CPG) is doing well, I talked about banking doing well, telecom has been a surprise for us. On a constant currency basis this quarter it grew 7.5 percent, double digit growth for the year.

Q: Let me get to the margin question, 24-26 percent was the aspirational target that you wanted to stay within. That has been softened to 23-25 percent now. Is there scope depending upon the kind of conversations you have, depending upon pricing strategy, is there scope to increase this or relook at this band at a later date and what are you doing to maintain margins, to ensure that there are cost levers in place to keep that band?

Ranganath: As I said earlier, the biggest outcome in my opinion for FY17 is stability in operating margins at 24.7 percent. If you recollect we had indicated couple of quarters ago, our band is 24-25 percent for FY17 and we are at the higher end of that band despite the lower revenue trajectory, cross currency pricing and everything. So, how that stability was achieved was primarily through a razor sharp focus on operations that you talked about whether it is utilisation — for Q4 it is actually 82 which is highest in 10-year, and yearly utilisation is high, subcontractor (subcon) is a percentage of revenue. It is lower this year as compared to last year.

Likewise, on-site employee cost as a percent of revenues, so, multiple levers have helped us to kind of offset some of the impacts that we had on the pricing and other things. So, we were able to maintain the operating margin despite this and also at the higher end, pretty much higher end at the guidance that we had given. Coming to this year, we have broadened the guidance. Earlier it was 24-25, now we have broadened the guidance to 23-25.

Q: Is that largely because of the pricing pressure and rupee movement?

Ranganath: Certainly rupee is one factor to consider. If you look at the rupee, if you look at compared to the last year average to current, it has already appreciated by over 3.3 percent. I think the trajectory of the rupee, you need to navigate. In addition, as Pravin and I mentioned earlier, we have certain on-site developments centers that we have to invest into, proactively address some of the visa related possibilities there. So, we have to take into account both the factors.