Infosys road map gets a thumbs-up from analysts

Even as the January-March quarter results and earnings before interest and tax (EBIT) guidance 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 after market hours on Monday, also reiterated its capital allocation policy of returning up to 70 per cent of free cash flow with periodic review of return cash balances.

Analysts say the strategy spelt out on Monday is geared towards building a servicescentric 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.

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

While announcing its January-March 2018 results last Friday, Infosys said it expects revenue for 2018-19 to grow in the range of 6-8 per cent in constant currency terms and 7-9 per cent in dollar terms. EBIT, it said, is likely to grow 22-24 per cent in 2018-19 as compared to 24.3 per cent in 2017-18, which disappointed the street.

“Infosys’ well-articulated strategy in digital, sales, talent re-skilling and localisation, coupled with the $2.79 billion 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 ~1,330,” says a note from Motilal Oswal Research.

However, Elara Capital has a contrarian view on the stock. It maintains a sell rating with a target price of ~1,120 and argues that the strategy seems less ambitious than that of the company's former CEO Sikka.

“Without focusing investment on developing relatively uncontested markets, we do not see how Infosys can accelerate growth or expand margins. While we think the 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.