Recent commentary suggests Infosys could guide to c1ppt higher than NASSCOM’s 10-12% y-o-y guidance for FY17e, which would be positive vs current expectations. Despite concerns on macro and industry deceleration, momentum is likely to sustain on the back of strong deal pipeline and order book. Notwithstanding, opportunities for improvement remain in broad based account mining and increasing per capita revenue, cost efficiencies and cash flows. Maintain Buy.
Growth leadership in FY17e, could guide to 11-13% y-o-y: Infosys y-o-y $ revenue growth has been the highest among the large caps in the last quarter. Given the order book (9MFY16 TCV 34% higher y-o-y), deal pipeline and commentary on deal win rates, this momentum should likely sustain despite the concerns of industry growth contraction (NASSCOM commentary and Cognizant’s guidance). Infosys could likely report 11-13% y-o-y guidance (vs NASSCOM at 10-12% y-o-y).
Opportunities on more broad based growth and improving cost, efficiencies and cash flow: Infosys has shown strong growth in the top accounts which have contributed to growth, on the back of direct focus on these from CEO office. We believe that this also presents an opportunity to replicate this success across a broader set of accounts. In addition, opportunities for improvement also lie on the cost side where increased automation can sustain/increase the high levels of utilisation, and reduce bench and subcontracting costs over the short to medium term. Increased investments have reduced cash flows in recent quarters that also has a scope for improvement.
Needs more concrete contours for the 2020 target: Infosys has reiterated its aspirational 2020 target—$20 bn revenue, 30% operating margins and per capita productivity of $80K per employee pa. However, now that the company is already over a year into this journey, it needs to articulate its strategy to achieve each of these targets more concretely e.g. which verticals or service offerings will drive growth, what role will efficiency drivers play in the growth and how they will drive margins and people productivity.
Infosys’ FY17e growth will remain highest among the Indian listed peers, in our view. We maintain our projections and 12M PT, based on 18x PE (5-year average 12M forward consensus) applied to the average of FY17e and FY18e EPS. Infosys remains among our top sector picks.
Risks: Weakening macro, higher competitive intensity, unfavorable cross currency moves, stronger INR.