Analysts factor in higher revenue & margin growth as company looks at investing in new technologies and abilities
Investor sentiment is turning positive around Infosys yet again. The stock is up 10 per cent over the last three months. While the market is keenly following Dr Vishal Sikka's blogs very closely to get a sense of what he intends to do to revive the company's flagging sales growth, Infy's top management met investors in Singapore earlier this month to highlight the key enablers that will help Infosys stage a comeback.
During the interaction, chief operating officer Pravin Rao and chief financial officer Rajiv Bansal have conveyed to analysts that under the leadership of Dr Sikka, the company's "desirablity" would improve over the next 18-24 months. Vishal Sikka, the company's newly minted CEO, is expected to outline his strategy at the second quarter earnings call in October.
While strategy may take some time to play out, there are short-term gains that can yield immediate benefits. Some levers are available to the company to improve productivity and margins, even as the Street believes that the low hanging fruits have been plucked already. The understanding is that margins could stabilise near 25 per cent in the short-medium term, as productivity gains offset some of the wage and currency-related pressures. Also, there's sufficient room left to improve the productivity.
Most of the gains so far have been driven by bringing down non-employee expenses from 17.6 per cent in 2005 to 11.9 per cent in FY14. During the same time, employee expenses increased to 61 per cent from 50 per cent. In contrast, TCS' employee costs are have remained constant between 56-57 per cent of revenues in the comparable period, despite wage hikes. This implies further margin expansion is possible.
The market is betting on the Sikka's vision, technological prowess to break into the Fortune 500 companies. Axis Capital expects strategic direction to be on sales effectiveness, innovation, development of industry solutions/platforms, and automation/industrialization in existing business (especially ADM, Testing, IMS).Infosys has earmarked $100 million towards innovative technologies. The company is also expected to get aggressive in making acquisitions to boost vertical expertise and to improve geographical footprint.
Most analysts are buying into the growth story sold by Infosys and as a result revenue forecasts are set to inch up. But before that the target price of the stock has already been revised upwards. In its base case, Motilal Oswal is assuming a 12.5 per cent growth in dollar revenues over FY16-18 (and 9 per cent in FY15), which implies 14% annualised returns. Acquisitions present a meaningful upside risk to the brokerage's base case estimates.
