Infosys Hires Ex-SAP Executive as CEO to Revive Margins

Infosys Ltd. named Vishal Sikka chief executive officer as India’s second-largest software services exporter turns to the former SAP AG executive to help reverse four straight years of narrowing profit margins.

Sikka, 47, will replace S.D. Shibulal and take charge on Aug. 1, Infosys said in a statement today. This is the first time the company based in Bengaluru, formerly known as Bangalore, will have a non-founder as CEO.

The new CEO will face the task of getting contracts in an environment where companies want mobile applications to interact with consumers and rent shared computing services rather than maintain their own servers. Sikka faces the additional challenge of taking charge at a time when almost a dozen senior executives have left since co-founder N.R. Narayana Murthy returned as chairman last year to help revive revenue growth.

“There was greater concern on investors’ minds about management direction as a sector leader,” Vineet Bhatnagar, managing director at PhillipCapital India Pvt., said on Bloomberg TV India. “Today’s announcement gives a lot of assurance to portfolio investors who look at the stock as a long-term hold for India ownership.”

Infosys declined 0.6 percent to 3,175.05 rupees at the close in Mumbai trading, after earlier gaining as much as 3.3 percent. The stock has gained 31 percent in the past 12 months, lagging behind larger competitor Tata Consultancy Services Ltd.’s 52 percent climb and third-ranked Wipro Ltd.’s 55 percent surge in the period.

Infosys in a separate stock exchange filing said a news report about a share buyback plan was “speculative.”

‘Locking Gains’

“The stock had run up in the past two days on the rumor of a buyback and Nandan Nilekani returning,” Ambareesh Baliga, managing partner of global wealth management at Edelweiss Financial Services Ltd. in Mumbai, said by phone. “Some investors are locking in the gains.”

Nilekani, one of the founders of Infosys, was co-chairman at the company before he left in 2009.

Sikka, who quit SAP in May, oversaw the development of new products, including a platform for quickly analyzing large databases, as chief technology officer at the world’s largest maker of business-management software. The Stanford University computer science Ph.D graduate is personable, creative, and good at creating a culture of innovation, according to Ray Wang, CEO of Constellation Research Inc.

“Vishal was responsible for putting together not only the development, but supporting the sales and marketing of the new product,” Wang wrote in an e-mail before the announcement. “This meant very active involvement in sales deals and planning the marketing strategy.”

New Era

Infosys, which counts Volvo Cars and U.S. pharmacy benefit manager Prime Therapeutics LLC among its clients, has said it aims to increase business from existing and new clients, enhance its portfolio of solutions offered 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, Sydney-based vice president at Gartner Inc., said before the announcement. “That’s an enormous opportunity but one that’s got to be seized.”

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

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.

Margins Narrow

The company’s operating profit margin shrank to 24 percent in the year ended March, the fourth straight year of narrowing, according to data compiled by Bloomberg.

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.

Infosys is losing both executives and frontline 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 company’s board, resigned on May 28.

‘Tremendous Opportunity’

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

“I see a tremendous opportunity of unencumbered path to help shape and help accelerate the transformation of the world around us with software,” Sikka said at a press conference in Bengaluru today. “Every industry, every walk of life and every company is going through this transformation.”

Murthy and S. Gopalakrishnan will step down as executive chairman and executive vice chairman respectively on June 14, Infosys said. To ensure a smooth transition, they will continue on the board until Oct. 10. K.V. Kamath will become non-executive chairman of the board on Oct. 11.

Sikka will be inducted as a director of the board and CEO-and managing director-designate on June 14, the company said.

Infosys has also elevated 12 leaders to the position of executive vice presidents with additional responsibilities, according to the statement.

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

(Updates with comment from Sikka in third paragraph after Tremendous Opportunity sub-headline.)
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