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Infosys has been battling with single-digit dollar revenue growth for the last few years. The current financial year is not likely to be different. Analysts expect the company to exit FY15 with an estimated dollar revenue growth of eight per cent, against Tata Consultancy Services (TCS)’s 17.5-18 per cent. The Street believes Infosys is expected to return to double-digit revenue growth in FY16, as new initiatives of the company are expected to bear fruit by mid-2015.
Vishal Sikka, the chief executive of Infosys, has identified the path that will take the company to the next level, without disrupting the existing business realities. Efficient allocation of capital is a critical part of this strategy. The Panaya acquisition is a step in this direction, with Infosys paying $200 million (six times Panaya’s annual revenues of $33 million).
Panaya provides applications that reduce the time SAP and Oracle spend during upgrades, testing and maintenance. The company has clients from the Fortune 500 list. Currently, it has 400 active clients, including Coca-Cola, Volvo, Mercedes-Benz, General Motors, Bosch, Toyota, and Walmart.
The deal may not boost earnings in the near term, but the market believes the acquisition reflects a changed mindset. Also, new business is expected to be margin accretive by FY16 as the business is a high net margin business (30-33 per cent). Motilal Oswal Securities says, "It is the biggest event substantiating our belief of improvement in capital allocation through inorganic activity. We believe this can co-exist with a much better payout regime, than the current post-tax board-approved 40 per cent.”
The company is banking on automation to bring down the cost of delivery when it comes to existing businesses and investing in building new capabilities. According to Antique Stock Broking, stability in the top management and relationships of Sikka should enable the company to achieve at least sector-level growth. Most brokerages are bullish on the company. Though the sector trades at a premium to the Sensex, if one excludes TCS, the sector's valuation is at a discount to the broader market. This leaves room for stocks such as Infosys to do well. According to Nomura, the sector is trading in line with its five-year average, but on excluding TCS, valuations are at a five per cent discount to average. Infosys is trading at 16.2 times FY16 earnings. Analysts expect the multiple to expand to 17 times as growth revives in FY16.
