Vishal Sikka's appointment as Infosys CEO cheers brokerage firms

Vishal Sikka's appointment as the CEO and managing director of Infosys on Thursday is being seen as a positive move amongst the analyst community. Over the last one year top-level exits, high attrition rate across the board and below industry growth rate has cast a shadow over the company's future. Brokerage houses feel that this move has shed some light over the road ahead.

“The announcement of new CEO could lead to restoration of investor confidence in to the stock for the time being. Additionally, this move would bring more clarity inside the organisation on top management front. We could see better clarity emerging on sales strategy from here-on,” said Daljeet Singh Kohli, head of research, IndiaNivesh Securities.

This is the first time in its 33 year history that a non-founder will be heading the Bangalore-based software-services company.  Prior to Infosys, Sikka (47) was the chief technology officer (CTO) and a member of the executive board at SAP AG, leading all products and driving innovation globally. He was responsible for developing and delivery across SAP’s product portfolio including software applications, analytics, cloud-based applications and mobile.

“Given his stature and experience with products and innovation at SAP, he will command the respect of Infosys’ leadership team and employees. In addition his strong client relationships can help Infosys win business with new and old customers and improve revenue growth,” noted Aniruddha Bhosale, research analyst, Deutsche Bank Research in its note.

Analysts pointed out that Sikka’s appointment at the country’s second-largest IT-services exporter will provide the much needed push for its 3.0 strategy, which set out to secure a third of its revenue from products, platforms and solutions (PPS) business. The over $8-billion company, globally renowned for its IT services, is betting on its fledgling PPS business, which currently accounts for only 5.1 percent of its overall revenue.

"Infosys’ focus on product, platform, and solution and consulting has failed to yield positive results due to a bad business cycle. We expect that under Sikka’s leadership, Infosys could renew its focus on Infosys 3.0 with growth from commoditised business IT as well," said Shashi Bhusan, senior research analyst, institutional equities, Prabhudas Lilladher.

Sikka, a Ph.D. in computer science from Stanford University, led multiple initiatives to accelerate innovation and research at the German software company. He was the brain behind SAP’s game-changing HANA, an in-memory database platform that processes high volumes of transactional data in real-time. His experience includes research in artificial intelligence, database and information management technologies and automatic programming.

According to executive chairman, NR Narayana Murthy, Sikka is the right candidate to lead Infosys in its next phase of growth.   

“Vishal is well-known globally for heading the creation of Hana and in-memory database and has been hailed as wonderful leader and tech visionary. He has extensive experience in managing global corporation. His illustrious track record and value system make him the ideal choice to head Infosys,” Murthy said during the press conference on Thursday. Sikka will be inducted as a whole-time director of the board and CEO and MD (designate) on June 14, while he will take over from S D Shibulal from August 1st, the company said.

However, some analysts of the opinion that Sikka’s products background could be a concern for a software-services company like Infosys.

“We are concerned about Sikka’s ability to run a services company. This could also have implications on his view of costs and hence margins. In this context,

Pravin Rao’s elevation as the COO could be a measure to manage costs and delivery. We continue to believe the recovery will be long drawn,” noted Bhosale of Deutsche Bank Research.  

Among the other changes in its top management, Infosys elevated U B Pravin Rao, President and whole-time director, as chief operating officer, with effect from June 14.

“The new team of Sikka (CEO) and Rao (COO) should provide necessary stability at the top. Near term actions for new management are likely to focus around strategic changes with greater push in services like infrastructure and BPO, along with higher risk which large contracts in these services entail; improving financial metrics like revenue growth and margins and operational issues, including reducing employee attrition,” said Bhuvnesh Singh, MD, head of India Research, Barclays.  

Earlier considered as an indicator of Indian IT industry's overall performance, Infosys has failed to post market leading growth over the last few fiscals. Even for the recently concluded FY14, the IT major managed to touch the lower-end of its guidance at 11.5 percent, still below the industry growth rate of 13 percent in FY14. Attrition rate during the January-March quarter stood at 18.7 percent, one of the highest in the company's history.

Partha Iyengar, country manager, research, Gartner India feels that Sikka has some quick task to fix. “The new CEO will have to move very quickly to first calm the three key stakeholders, employees, customers and the investors, in that order. Infosys cannot afford any more resource departures especially at senior levels. He will next have to establish credibility with those stake-holders, again, in a fairly short period and then energize them in the medium to long term,” said Iyengar.

The announced also marked the exit of Murthy from the company, and on his way out he will be joined by rest of the founders who still hold seats in Infosys. Murthy and S Gopalakrishnan will step down as executive chairman and executive vice chairman, respectively, on June 14, 2014.   

Since Murthy’s returned to Infosys last June as chairman, the IT-services firm has been on a restructuring drive of its sales team in the country and abroad, including the US, its largest outsourcing market. The IT firm is looking at optimising costs and streamlining its workforce across locations.  

“The key positive of Murthy's first year of comeback has been a strong focus on cost control leading to margin expansion of about 200 basis points over the previous four quarters,” noted Singh of Barclays.  

The executive chairman’s office will be dissolved and Murthy’s son Rohan Murty, whose appointment was co-terminus with the executive chairman, will also leave the company. The remaining members of the chairman’s office will take up other responsibilities in the company.   

Shares of Infosys closed at Rs 3166.60, marginally down 0.38 percent on the Bombay Stock Exchange on Thursday, while the sensitive index, Sensex, ended the day up 0.40 percent.