How achievable is Infosys' FY20 vision?

While some analysts are optimistic, others believe the targets are ambitious

While announcing its March 2015 quarter results on Friday afternoon, Infosys management shared the company's vision for 2020. It said, Infosys aims to clock in $20 billion annual revenue by 2020 ($8.7 billion in FY15), improve employee productivity by 50 per cent and take up the EBIT (earnings before interest and tax) margin to 30 per cent from 25 per cent currently. Higher revenue contribution from new services such as design thinking, artificial intelligence and intellectual property; increased focus on inorganic growth and higher revenue per employee are the three areas which will help Infosys achieve these targets. However, many analysts doubt the company will be able to achieve its vision, especially on the revenue front.

Ambit analysts estimate Infosys' FY21 revenues at $17 billion with a margin of 26 per cent, which is reasonably short of the goals set by the company management.

"Infosys's stated targets for FY20 imply about 18 per cent revenue CAGR, 13.6 per cent of which by renewing existing services, the rest from acquisitions and new services, and margin expansion", estimate analysts at BNP Paribas. While they believe successful implementation of FY16 targets could lend credibility to future goals and could take the stock price higher, they add that Infosys has guided for a 10-12 per cent constant currency revenue growth in FY16- which appears to be optimistic. They say Infosys' FY17 as well as FY20 goals look lofty, but are not ruling out a likely radical transformation going forward. Even if one were to consider that the target is for CY20, the goals are not easy to achieve.

The past provides an indication. Infosys' dollar revenues grew at a compounded annual growth rate (CAGR) of 9.6 per cent over FY11-15. Analysts estimate that the $20 billion target by CY20 implies revenue CAGR of over 15 per cent - which is also a significant upmove compared to recent revenue growth trends at Infosys. Even after excluding the $1.5 billion of inorganic growth, the CAGR works out to 14 per cent. Further, Infosys management expects traditional business to continue to be under pressure and is hoping that the newer service lines will aid incremental revenue growth. However, while these new areas have high growth potential they also have higher competitive intensity.

Manik Taneja, IT analyst at Emkay Global terms Infosys' vision as "ambitious" and has downgraded the stock to Hold from Buy earlier. "Infosys's valuation multiples had improved since the appointment of Dr Sikka as CEO in May'14 in the hope of Infosys's recovery (and thereby driving Infosys's outperformance to peers), however positive outcomes would need to preclude any further stock upsides given modest achievements till date", he writes in a post results report on the company. Ashish Aggarwal of Antique Stock Broking, too, remains apprehensive. "Although it remains to be seen whether Infosys will achieve its target, we feel it is ambitious and will be difficult to achieve", he says.

Infosys' aspirations to improve revenue per employee might also prove to be a tall task, believe analysts. "The goal of increasing per capita revenue is a steep one and involves about 7-8 per cent increase in CAGR, which requires a radical move towards automation and higher-priced services", believe analysts at Nirmal Bang. They believe large deal win total contract value numbers coming out of Infosys have been below what is required for a company of its size to grow at industry rate and have been poorer than some of its smaller peers on a consistent basis. Infosys' margin aspirations, too, appear stretched given the difficult revenue targets. However, a big acquisition can be an enabler to Infosys' growth going forward.

Some analysts, however, are still fine even if Infosys misses the topline target by a few percentange points.

Shashi Bhusan, IT analyst at Prabhudas Lilladher, says, "Even if Infosys misses the revenue estimate by 10 per cent, the company can still achieve 14 per cent plus EPS CAGR over FY15-21. We see both, guidance and vision, ahead of consensus expectation". He, however, remains bullish on the company.

Overall, analysts remain positive on Infosys, given the measures taken to improve growth and profitability, though it remains to be seen to what extent the company is able to achieve its vision. Most analysts polled by Bloomberg post Infosys' results have a Buy rating on the stock. Their average target price of Rs 2,203 implies upside potential of about 11 per cent from Monday's closing price of Rs 1,986.