Info-tech

Analysts sceptical about Infy meeting targets

Venkatesh Ganesh Bengaluru | Updated on January 23, 2018 Published on May 05, 2015

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High growth is a thing of the past for the software major, they feel



While the vision laid out by CEO Vishal Sikka for Infosys has been applauded, analysts are not convinced whether the company can achieve the set targets as it’s still in a transition phase given the changing dynamics in outsourcing.

In the recently concluded 2014-15 annual results, Sikka announced that the country’s second largest IT exporter will aim to achieve $20 billion by 2020, hit a revenue per employee of $80,000 and improve EBIT (earnings before interest and tax) to 30 per cent.

‘Aspirational’ target

Currently, the company has a revenue of $8.5 billion, an EBIT margin of 25 per cent and a revenue per employee in the range of $50,000-54,000. At the results, Sikka said this is an ‘aspirational’ target and should be looked more as a guide post to steer the company forward.

However, analysts, unconvinced about the targets, point to the numbers posted by the company in the recent past. For the sixth consecutive quarter, revenue growth has decelerated. Boz Hristov, an analyst at Technology Business Research (TBR), says this highlights the company’s struggles to successfully balance growth and innovation. For Infosys to achieve this milestone, it needs to grow at a CAGR (compound annual growth rate) of 17 per cent for the next five years. But according to TBR’s IT Services Vendor Benchmark Index, revenue growth will remain in the low single digits in the next few years.

The problem of growth has been nagging at the company’s heels for the last few years (see table). At the end of FY-2015, Infosys posted an annual growth of 5.6 per cent in dollar terms, below the projections of 7 per cent. “Earlier, this was the same company that used to beat guidance like the way Australian cricket team was beating others. That seems to be a thing of the past,” said a senior vice-president from a top-five IT company.

“For design thinking to have a meaningful impact, Infosys must apply it across its business on a broad scale, which will not only take a long time, but also require a cultural change and new organisational capabilities,” said Peter Schumacher, CEO, Value Leadership Group.

Another analyst who did not want to be named said there are a whole host of questions that needs to be answered. “Is design thinking something that is really differentiating? “What will really change? What unique value will Infosys develop for its customers? Does it possess any unique advantage?” he asked.

Sikka, however, believes strongly that there is a big shift in outsourcing and the company is aggressively making investments in automation, acquiring niche companies with design thinking as the backbone of all its services. Some analysts believe this transition can be possible. Sanchit Gogia, an analyst at Greyhound, points out that Sikka has been strongly moving from traditional IT services to transformation deals, involving automation and artificial intelligence, backed by the recent acquisitions of Panaya and Kallidus.

Traditional services

However, the numbers still favour the traditional IT outsourcing business, which contributes in excess of 60 per cent, followed by consulting and products which make up the rest of the revenue. Sikka admits that traditional IT services are a large chunk, but is convinced that modern day outsourcing is all about an integrated approach.

Meanwhile, with IGATE having merged with Capgemini, there is another serious player in the North American market with a bigger balance sheet. “The recent acquisitions will help Infosys drive technology innovation, but it will remain on the delivery side of the equation and will not be enough to meet its goal. The company could fill some of this gap through a mega acquisition similar to Cognizant’s TriZetto that will help it move the needle toward its 2020 goal,” says TBR’s Hristov.

Published on May 05, 2015
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