Infosys’ new CEO Salil Parekh is definitively moving away from a path that predecessor Vishal Sikka charted. On Friday, the company said it is selling off Panaya and Skava, the two significant acquisitions made under Sikka, and which was part of the latter’s strategy to infuse an element of software products into what has been primarily an IT services company.
Panaya had been acquired for $200 million, and Skava for $120 million. Infosys said it expects to sell these assets valued at Rs 2,060 crore ($316 million) and having liabilities amounting to Rs 324 crore ($50 million). The company has written down the value of several of the acquisitions done under Sikka.
Salil Parekh said the company had conducted a strategic review and had found that Skava and Panaya do not fit into the direction the company wanted to take. Panaya had also run into major controversy following co-founder N R Narayana Murthy’s allegation that there were irregularities in the deal.
Panaya is a product that helps to reduce the complexities faced by businesses in managing their enterprise applications. Skava enables retailers to provide a mobile specific experience to customers. The company did not offer any detailed reasons for selling these. But analysts have long been debating whether Infosys should be getting into software products, or should stick to its core strength of providing services that bring together the multitude of applications that enterprises use.
“There is a change in the market environment and businesses have changed their focus, and given that we have decided to focus on four pillars – boosting the digital business which contributes about 25.5% to the topline, focusing on artificial intelligence and automation in client interaction, increasing localisation in core markets of US and Europe, and reskilling of employees,” Parekh said.
Infosys expects to perform better this fiscal compared to the last. It has projected a growth rate of 6%-8% on constant currency basis. The guidance is higher than the 5.8% revenue growth that it achieved in the last fiscal.
The company’s better expectations seem to be coming from the healthy performance seen in Europe, which grew at 3.6% in the last quarter. The US, the main market, barely grew at 0.1%. Chief operating officer U B Pravin Rao said that the US remains a challenge as the big banks continue to spend less on technology upgrades. The insurance segment, and the energy & utility vertical have been doing well for the company.
However, Infosys has projected a lower operating margin for this fiscal at 22-24%. The company had ended last fiscal with a margin well above 24%. It has hitherto been a margin leader in the industry. But several analysts have in recent times advised the company to move away from a high margin strategy to be able to invest in the new digital spaces.
Peter Bendor-Samuel, CEO of IT consulting firm Everest Group, told TOI recently that Parekh should reset margin and growth expectations to give himself and Infosys flexibility and running room to make the pivot to the new high growth digital marketplace. “I expect he would like to do this but will be constrained by his board and investor expectations,” Bendor-Samuel had said.
Looks like he has been given the room to do it. “Our margin guidance reflects our emphasis on digital-led growth. We will focus our investments in underinvested areas of digital, enhance investments in the US and revitalize sales in respect to large deals,” said chief financial officer M D Ranganath.
But investment bank UBS said “the markets are likely to view the lower margin guidance band negatively.” And indeed that is what has happened. In early trade in US markets, the Infosys share was trading down nearly 7% on Friday.