Infosys’s Sikka Brings SAP Expertise to Transform Margins

Infosys Ltd. (INFO)’s Vishal Sikka says he sees the chance to transform the world with software. First, he may need to transform the Indian outsourcing company that just hired him to be its chief executive officer.

Software, digital technology and computing are reshaping the world, Sikka, 47, said yesterday at Infosys’s headquarters in Bengaluru, formerly known as Bangalore. The Indian-born California resident said he sees “a tremendous opportunity to help shape and help accelerate the transformation. Every industry, every walk of life and every company is going through this transformation,” he said.

Sikka, who spent 12 years at German business software supplier SAP AG (SAP), may be just the accelerant Infosys needs as it looks to reverse narrowing profit margins. The Indian software services provider wants to maintain its importance in a world where companies are moving computing tasks to “cloud” programs from Microsoft Corp., Amazon.com Inc. and Salesforce.com Inc., rather than writing the code themselves.

“The move signifies Infosys’s commitment to something new and a heavier focus” on higher-margin, intellectual property-based products and services, Constellation Research Inc. CEO Ray Wang said in an e-mail. “It also shows that the firm is not afraid to try something different.”

Photographer: Namas Bhojani/Bloomberg

Vishal Sikka, incoming chief executive officer of Infosys Ltd. Close

Vishal Sikka, incoming chief executive officer of Infosys Ltd.

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Photographer: Namas Bhojani/Bloomberg

Vishal Sikka, incoming chief executive officer of Infosys Ltd.

Sikka is getting his chance after an abrupt departure from SAP last month. The new CEO will face the task of winning outsourcing contracts in a rapidly changing environment where companies want mobile applications to interact with consumers and rent shared computing services rather than maintain their own servers.

‘Good Reputation’

At Infosys, SAP’s former technology head needs to reverse four straight years of narrowing profit margins and spur sales growth that trails its larger competitor Tata Consultancy Services Ltd. Sikka, who will assume office for a five-year term on Aug. 1, faces the added challenge of taking charge at a time when at least 11 senior executives have left in the past year.

“Sikka has a good reputation and track record at SAP, and we will have to see what steps he takes to turnaround the business,” said Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets including Infosys shares. “It looks like a good first step,” Maier said, adding it would take a few quarters to turn things around.

Infosys fell 0.4 percent to 3,163 rupees as of 10:17 a.m. in Mumbai trading, extending the stock’s decline this year to 9.3 percent. The company is the worst performer in the period on the benchmark S&P BSE Sensex Index, which has climbed 21 percent. Tata Consultancy has added 1.3 percent and smaller competitor HCL Technologies Ltd. has gained 12 percent in 2014.

Profit Margin

The company’s gross profit margin narrowed to 35.8 percent in the fiscal year that ended this March from 45.8 percent in the 12 months ended in March 2009, according to data compiled by Bloomberg. In contrast, the margin at software maker SAP widened to 70.3 percent in 2013, from 65.2 percent in 2008.

At Microsoft, Oracle Corp. and SAP, gross margins are at least double Infosys’s.

“They’re currently underearning what they’ve earned historically,” said Andrew Zamfotis, an analyst at Eva Dimensions in New York who has an “overweight” rating on Infosys. “A lot of that has come down to the gross margins. They’ve taken a hit on pricing.”

Hana Database

At SAP, Sikka rose to oversee development of new products, including a database called Hana that takes advantage of modern computers’ ability to store vast amounts of information in fast memory chips, rather on slower magnetic disks.

The executive, with a doctorate in computer science from Stanford University, used his mentor-protégé relationship with co-founder, Hasso Plattner, to push through development of Hana that was meant to lessen the German company’s dependence on rival Oracle Corp.

Sikka wasn’t shy about touting his accomplishments and relationship with Plattner, 70, to cement his maverick status. He took to calling Hana “my little girl” in his public comments, even noting the product’s birthdays. He started a series of satellite offices outfitted like startups and moved developers out of SAP’s cubicle-filled offices and into the rented spaces with concrete floors, home-supply-store chalkboards and cheap sofas.

California-Based

The former SAP executive also used his Silicon Valley connections to expand Hana’s sales by striking deals to deliver the software with Adobe Systems Inc. and VMware Inc. Sikka said yesterday he plans to continue residing in California while spending large chunks of time in Bengaluru for Infosys.

In his presentation to media yesterday, he wore a Silicon Valley-style ensemble of a black golf shirt and sport coat,

Sikka, who will replace S.D. Shibulal, will be the first non-founder to lead Infosys.

Infosys counts Bank of America Corp. and Daimler AG among its clients and has said it aims to increase business from existing and new clients and expand geographically even as it seeks to cut costs.

“The environment they’re in is really a whole new era, where information technology is absolutely everything,” Rolf Jester, an analyst at Gartner Inc., said before the announcement. “That’s an enormous opportunity, but one that’s got to be seized.”

Sikka, who vowed to stick with Infosys’s current strategy, will need to improve its implementation and win clients for its products and services, according to Jester.

‘Break-through Innovation’

“There is no change in strategy at this time,” Sikka said yesterday. “We are going to continue unperturbed on the path that we are on and look for ways to bring the break-through innovation in new areas as we go forward without disrupting what we have done before.”

Infosys on April 15 forecast full-year sales will climb 7 percent to 9 percent in U.S. dollar terms, exceeding the 6 percent to 8.3 percent average of six analyst estimates compiled by Bloomberg. It posted a 25 percent jump in fourth-quarter profit, beating analyst estimates.

Founded in 1981 with $250 in capital and seven software engineers, Infosys signed its first customer in the U.S. later that year and opened its first overseas office in Boston in 1987, according to its website. Since it was started, four different founders have taken turns at the helm.

Employee Attrition

Infosys is losing both executives and front-line staff. On June 5, it said Prasad Thrikutam, vice president in charge of strategic sales and marketing, quit after 19 years at the company. B.G. Srinivas, who oversaw units that served the insurance, manufacturing and financial-services sectors, as co-president and a member of the board, resigned on May 28.

The company’s attrition rate was a record-high 18.7 percent in the quarter ended March. That compares with about 11 percent at Tata Consultancy.

Still, clients such as Toyota Motor Corp. have shown their support for Infosys, and it has won orders from Volvo Cars and U.S. pharmacy benefits manager Prime Therapeutics LLC.

“Restoring a sense of pride and confidence and inspiration in the teams is one of the things that we will work on” over the next six to seven weeks at Infosys, Sikka said. “And of course working together with the clients, in understanding some of the unique challenges that they have, some new things that we can do together, how existing things can be done better.”

To contact the reporters on this story: Suresh Seshadri in Bangalore at sseshadri1@bloomberg.net; Aaron Ricadela in Frankfurt at aricadela@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Subramaniam Sharma, Suresh Seshadri

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