Quick­en­ing Pace of Growth Need of the Hour for Infy

QUAN­TUM JUMP IT ma­jor needs to grow at nearly 23% to achieve its tar­get by 2020

The Economic Times - - Markets: Beating Volatility - Ran­jit.Shinde@ times­group.com

ET In­tel­li­gence Group: Has In­fosys fi­nally found its mojo back? It may be too early to con­clude so, but its an­nual growth guid­ance shows that the man­age­ment of the country’s sec­ond largest soft­ware ex­porter has once again started talk­ing about in­dus­try beat­ing growth amid sus­tain­able prof­itabil­ity and de­mand trac­tion. But, there are chal­lenges ahead, in­clud­ing pres­sure on pric­ing, in­tense com­pe­ti­tion on new tech­nol­ogy plat­forms and cur­rency fluc­tu­a­tions.

On Fri­day, In­fosys guided for 11.8-13.8% growth in dol­lar-de­nom­i­nated rev­enue for FY17. If it suc­ceeds in meet­ing the tar­get, this would be the high­est an­nual growth since FY12 when it had re­ported 15.8% growth. Also, af­ter quite a while, In­fosys has given a guid­ance that ex­ceeds a rather tepid pro­jec­tion of 10-12% rev­enue growth for the cur­rent fis­cal by the in­dus­try body Nasscom.

The rel­a­tively bet­ter growth guid­ance is based on stronger or­der book trac­tion. Six large projects worth $757 mil­lion were added dur­ing the March 2016 quar­ter. Over the 12 months to March, the com­pany bagged 21 large deals worth $2.8 bil­lion. The mo­men­tum is vis­i­ble in terms of client ad­di­tions as well. The gross num­ber of clients in­creased by 89 dur­ing the March 2016 quar­ter. The last time it added as many clients was way back in the De­cem­ber 2011 quar­ter.

While it sounds promis­ing, a crit­i­cal task is to sus­tain and ac­cel­er­ate the rate of growth in the next few years. Chief ex­ec­u­tive Vishal Sikka has set an am­bi­tious goal of earn­ing $20 bil­lion in rev­enue by 2020. In­fosys closed FY16 with $9.5 bil­lion of topline. Go­ing by its rev­enue guid­ance, it may be able to clock rev­enue of $10.8 bil­lion in FY17. To achieve the goal by 2020, it would have to re­port an an­nual growth of nearly 23% from next year. This is dif­fi­cult but not im­pos­si­ble since the com­pany had shown such a ro­bust growth in the past, al­beit at a lower rev­enue base.

But, it would be a tough road ahead. While the busi­ness is grow­ing, price at which projects are bagged is fall­ing on an av­er­age as com­pe­ti­tion in­ten­si­fies. In FY16, re­al­i­sa­tions fell by 4.7% in re­ported cur­rency and by1.1% keep­ing the cur­rency rate con­stant. This means, to pro­tect its tar­get op­er­at­ing mar­gin band of 2426%, the com­pany will have to find ways to im­prove em­ployee util­i­sa­tion from the cur­rent level of 74.7%, in­clud­ing trainees. It was 81% for Tata Con­sul­tancy Ser­vices (TCS), the country’s largest soft­ware ex­porter, and 85% for the fourth largest HCL Tech­nolo­gies in the De­cem­ber 2015 quar­ter.

The stock val­u­a­tion of In­fosys may look at­trac­tive to long-term in­vestors given its strong growth pro­jec­tion. At Wed­nes­day's clos­ing price of .₹ 1,172, the stock’s price-earn­ings (P/E) mul­ti­ple was 17 con­sid­er­ing FY17 ex­pected earn­ings.

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