Sikka magic may revive high growth at Infosys

Analysts bullish as company looks to invest in new technologies

Investor sentiment is turning positive around Infosys yet again. The stock is up 10 per cent over three months and the market is keenly following the company’s newly-minted chief executive Vishal Sikka’s blogs to get a sense of what he intends to do to revive the company’s flagging sales growth, Infosys’ top management met investors in Singapore earlier this month to highlight the key enablers that will help the firm stage a comeback. During the interaction, chief operating officer Pravin Rao and chief financial officer Rajiv Bansal conveyed to analysts that under the leadership of Sikka, the company’s “desirability” would improve over 18-24 months.

Sikka is expected to outline his strategy at the second quarter earnings call in October. While strategy might take some time to play out, there are short-term gains that can yield immediate benefits. Some levers are available to improve productivity and margins, even as the Street believes the low-hanging fruits have already been plucked. The understanding is that margins could stabilise near 25 per cent in the short and medium term, as productivity gains offset some of the wage and currency-related pressures. Also, there’s sufficient room left to improve 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, Tata Consultancy Services (TCS)’ employee costs are have remained constant between 56 and 57 per cent of revenues in the comparable period, despite wage hikes. This implies further margin expansion is possible.

The market is betting on 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/industrialisation in existing business . Infosys has earmarked $100 million towards innovative technologies. It is also expected to get aggressive in making acquisitions to boost vertical expertise and to expand geographical footprint.

Most analysts are buying into the growth story sold by Infosys and, as a result, revenue forecasts are set to inch up. However, 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 nine per cent in FY15), which implies 14 per cent annualised returns.  Acquisitions present a meaningful upside risk to the brokerage’s base case estimates.