Gaining lost ground | Value Research Infosys faced a number of issues since the 2008 crisis, but the appointment of a new head has enthused the company
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Gaining lost ground

Infosys faced a number of issues since the 2008 crisis, but the appointment of a new head has enthused the company

The situation
The global recession of 2008 saw IT orders dry up, especially in the US, the world's largest tech market. Fresh orders were won by aggressive bidders, even at lower margins. Infosys stuck to its guns; it would not compromise on margins - and it paid the price. Growth faltered; margins took a hit; and, more importantly, employees, the most vital asset for tech firms, began to flee Infosys. Around 36,000 techies left Infy in 2013-14. Another 37,000 left in the following year. To make matters worse, close to a dozen top executives exited.

What's changed?
The appointment of Sikka as the head in August last year has enthused the company and the markets.

Triggers

  • One of the first tasks for Sikka was to stem attrition. The new CEO doled out higher compensation packages, promotions and further increments. These measures worked. Attrition is down and the number of employees leaving the company has halved between March 2014 and March 2015.
  • Sikka has set a revenue target of $20 billion by 2020, up from current run rate of $8.7 billion (FY15). Also on target is a 30 per cent operating margin, up from 25.9 per cent now.
  • A number of Sikka's key associates have joined him from his previous stint at SAP. This fuels confidence in both Sikka and his plans for Infosys for the future.
  • Automation and investments in new startups is Sikka's focus area to get into the game early.
  • Sikka has brought an acquisition-led growth strategy back to Infosys. He has already made two acquisitions. Infy has guided that acquisitions could bring in $1.5 billion of total revenues by 2020.

What lies ahead?
It is still early days for Sikka. But he has stemmed attrition and arrested margin decline. A bigger task for him is to change the perception that Infy is a sinking ship. He has set a target for both employees and investors to look forward to. Infy today is still between the old ways of its founders and the new methods of Sikka. Turning this ship into shape will likely take a couple of years.

Valuations
Infy trades at a P/E of 18. Buy.


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