Infosys' three-year road map gets a thumbs-up from analysts

Even as the January – March 2018 (Q4FY18) results failed to enthuse investors, most analysts have given a thumbs-up to the three-year road-map laid out by Infosys to accelerate growth in the digital segment. 

Infosys, which detailed its strategy to analysts in post market hours on Monday, also reiterated its capital allocation policy of returning up to 70 per cent of free cash flow (FCF) with periodic review of return cash balances.

Analysts say the strategy spelt out on Monday is geared towards building a services centric business model. They, however, caution that the company now needs a stable top management as execution of this vision is key.

“We don’t see this as a stark contrast to the previous leadership but the focus is now clearly more on services centricity of the business model. Infosys has a fair share of digital revenues (25.5 per cent of sales), but the execution will need a stable leadership,” say Rumit Dugar and Aniket Pande of IDFC Securities in a report.

Analysts at Edelweiss Securities agree. They believe Infosys’ new leadership is refining the strategy from where the previous CEO (Vishal Sikka) left it. The thrust, they feel, remains on design thinking, artificial intelligence (AI) and digital; albeit with quick realignment to where clients’ spends are shifting. 

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That apart, there’s enhanced focus on investing in selling and marketing efforts, expanding local talent base and re-skilling staff, which should benefit the company in the long run, they say.

While announcing its January – March 2018 quarter (Q4FY18) results in post market hours last Friday, Infosys said it expects revenue for FY19 to grow in the range of 6 – 8 per cent in constant currency (CC) terms and 7-9 per cent in US dollar terms. 

Earnings before interest and tax (EBIT), it said, is likely to grow 22-24 per cent for 2018-19 (FY19) as compared to 24.3 per cent in FY18, which disappointed the street.

“Infosys' well-articulated strategy in digital, sales, talent re-skilling and localisation, coupled with the $2.79b base of digital revenues, provides a good base to kick-off its next innings. With previous distractions behind, the focus is back on execution. We maintain our buy rating on Infosys with a price target of Rs 1,330,” says a note from Motilal Oswal Research.

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However, Elara Capital has a contrarian view on the stock and the strategy. They maintain a sell rating with a target price of Rs 1,120 and argue that the strategy seems less ambitious than the ex-CEO.

“Without focusing investment on developing relatively uncontested markets, we do not see how Infosys can accelerate growth or expand margin. While we think management’s sales investment should help it improve win rates and client mining, we do not believe it will lead to a sharp improvement. We see more downside and revise our rating to sell from reduce and urge investors to switch to TCS and HCL Technologies,” say Ravi Menon and Ashish Agrawal of Elara Capital in a report.

Brokerage Rating Target price (Rs) Upside / downside from CMP (%)
IDFC Securities Outperformer 1,250 7.3
Motilal Oswal Research Buy 1330 14.2
Antique Stock Broking Buy 1265 8.6
Edelweiss Research Buy 1419 21.8
Elara Capital Sell 1120 -3.9
Source: Research reports      

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