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
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.