Infosys is looking at FY19 as a year of stabilisation, FY20 as a year to generate momentum, and FY21 as a year to accelerate growth.
Margin guidance of 22-24%: While utilisation is at near optimum levels, the company sees margin levers from improvement in (i) onsite mix, (ii) role ratios across both onsite and offshore, and (iii) automation. The company has guided for Ebit margins of 22-24% for FY19, which is a 100bps reduction vs earlier, to invest in (i) digital, through investments in re-skilling and refactoring talent, (ii) sales, and (iii) increasing localisation. It has outlined 4 pillars of strategy:
(i) Scale up agile digital business: this will be through a five-element pentagon strategy focussed on Experience (user experience & omnichannel), Insight (data management and analytics), Innovate (product engineering and IoT), Accelerate (legacy modernisation and cloud migration) and Assure (security to mitigate risks). Infosys thinks that the market opportunity of these five elements is of the order of Rs 160 bn+ currently.
(ii) Energise the core: Increasing use of automation and AI across service lines by hiring automation specialists. Infosys indicated that it is looking to increase the scope of automation across service lines, especially in Testing, IMS and BPO. Infosys thinks that only 50% of test case execution is automated currently. The company aims to automate ~70% of testing work (vs the current level of 25-30%).
(iii) Re-skilling or refactoring of people: To refactor or re-skill talent, Infosys is (i) building a pyramid structure in the US by employing graduates from universities, not necessarily in STEM fields, but in areas such as liberal arts, design etc., (ii) attracting talent from IITs as power programmers, (iii) using third-party players to source talent, (iv) hiring employees with adjacent skills and up-skilling them, (v) going the inorganic route and, (vi) re-skilling the available talent pool through its own proprietary learning tool Lex.
(iv) Expand localisation: Infosys is transitioning from an onsite-offshore model to an onsite-nearshore-offshore model by: (i) recruiting more localised talent (ii) building workplaces closer to client clusters to facilitate a co-creation environment.
We retain our cautious stance on INFO as we believe (i) Outlook on ~70% of revenues (US BFSI, Retail, manufacturing and telecom) and deal wins ($3 bn+ in FY18 with ~30% net new deals) suggests no material revival, (ii) Strategy to reduce gap on growth and drive larger deals could take time to come to fruition and in the interim we believe INFO could grow towards the lower end of its guided band in FY19F and underperform peers like TCS, (iii) Margins could be under pressure on exhausting traditional levers (utilisation, limited hiring and low wage hikes), with investments required in sales, digital and localisation. Overall we expect INFO to post $ revenue/EPS CAGRs of 6.6/6.1% over FY18-20F. The stock trades at 16.2x FY20F. We are Reduce on INFO with a target price of Rs 1,020.