Infosys, India’s second-largest software exporter, is gunning for higher margins as it aims to earn half its revenue from the company’s fast-growing digital portfolio, according to its chief executive Salil Parekh. Buoyed by the strong deal wins in the first quarter of this financial year, the Bengaluru-based IT giant is signaling a revival after a protracted spell of management turmoil, technological shifts and regulatory upheaval in its largest market had marred business in recent times.
The forecast of double-digit revenue growth at the higher end for this year and the possibility of deal wins in excess of $6 billion it had bagged in fiscal year 2019 is lifting the confidence of Infosys’ top executives who believe hiring top notch talent for sales and strategic acquisitions to boost digital capabilities is now paying off.
“Our stated objective is to have a high margin business. There is no question on that,” Salil Parekh, CEO of InfosysNSE 0.09 % told ET in an exclusive interview on Thursday. He declined to share a timeline of when Infosys expects to garner 50% revenue from digital technology solutions.
‘Attrition an Issue’
“We have done with our investments,” said Parekh, pointing to the company’s current margin guidance of 21-23%. “(We will) continue that and overtime scale that up. Because the more differentiated business we build the more we will be able to provide margins that are higher,” he said. Since assuming charge as Infosys chief in January 2018, Parekh has cut operating margins twice. In April 2018, he reduced margin expectations to 22-24% for FY19, and brought it further down to 21-23% in March 2019. TCSNSE -0.44 %, its largest rival with over twice its revenue, has committed to a margin band of 26-28%, the highest among IT services companies globally.
Parekh had cited his strategy of bringing stability and focusing on investment to grow the business as a reason for the conservatism. However, that could change now. In July, Infosys raised its revenue forecast to 8.5-10% after growing faster than TCS in the first quarter. It also won contracts worth $ 2.7 billion in the three months to June, raising the hopes of exceeding the $6 billion deals that it won in FY19.
Analysts are of the view that Infosys and TCS are tapping a business — digital services — that is growing not just for them, but across industry.
In the last quarter, the company earned 35.7% of revenue from its digital business, higher than larger rival TCS, India’s largest software exporter, which clocks 31% of its revenue from digital business.
Growth in contract value has been between 20% and 30% in digital and cloud-based deals across industriesNSE -1.34 % in first half of 2019, according to technology researcher ISG.
“Infosys is positioned as a premium service provider along with TCS, IBM and Accenture. This itself helps get higher margins,” says Mrinal Rai, principal analyst at ISG Group. “They have also been effective in tapping medium-sized companies with their productised approach and IP-based offering with a payas-you-use model. This caters to all sizes of clients.”
However, attrition has been an issue, Infosys has admitted. The company has seen nearly 20% attrition mainly in the crucial 3-5 years of experience bracket of its employees who are skilled in the newer digital segments, where talent is scarce across the industry. If the number of people who quit the BPO unit of Infosys is not counted, attrition is still at manageable levels, say company executives.