Rating: Add
Management meeting notes. Key takeaways from our discussions with Rajiv Bansal, CFO of Infosys—(i) steady demand environment, except deterioration in energy and utilities verticals. We believe the company is on track to achieve FY2015e constant-currency growth guidance, (ii) Infosys has several margin headwinds over the next 12-18 months; it will strive to keep profitability at respectable level, and (iii) changes led by the new CEO (like heavy investments in the back end, training, etc) decentralisation of the organisation structure, flexibility in pricing and deal structures, increase of feet on the ground (sales a and marketing) shall ensure solid revenue growth in the medium term. We maintain Add rating and the target price of R2,350.
No risk to FY15e guidance: Infosys highlighted incremental deterioration in demand in the utilities vertical (5.5% of revenues) since its Q2FY15 reporting. The company had indicated weak spending in telecom and retail during Q2 results announcement. Except weakness in the utilities vertical, Infy has not witnessed any incremental deterioration (since Q2FY15 reporting) in demand. Cross-currency headwinds could impact $ revenue growth rate by 150 bps in Q3FY15. We believe the company is on track to achieve 7-9% growth guidance in constant currency, though the number will be closer to the lower end of the guidance range.
Operating margins: Infosys faces the following margin headwinds in FY16—(i) full impact of 20,000 promotions in the past four months, (ii) normal cycle of wage revision and promotions and (iii) decline in utilisation rates ex-trainees from the current 82% to 79-80%. Further, the company believes there is limited scope to rationalise onsite costs; onsite:offshore mix has already hit an optimum level and there are little low-hanging levers to improve margins. In addition, investments required to create ‘Infosys of the future’ as outlined by Dr. Sikka will create additional margin headwind. The company believes that it will be difficult to sustain recent-quarter Ebitda margin of 28.3%.
Taking the right steps for sustainable revenue growth: Infosys made a number of changes to the organisation structure, disbanded power structures, hired new talent and instituted mechanisms for performance and accountability. Flexibility in pricing decisions and deal structures, investments in the back-end, adding more feet on the ground are steps in the right direction. Though these measures will take time to deliver, the company is on the right track to reach its articulated revenue growth targets.
—Kotak Institutional Equities
