Event update: Infosys (Outperformer) - Strategy geared towards scaling digital
Strategy built around Digital to expand addressable market: Infosys elaborated on their strategy which revolves around four key pillars 1) Scaling agile digital, 2) Energise the core, 3) Re-skill people and 4) Expand localisation. To scale agile digital, the company has built a service architecture that covers multiple aspects like, digital experience, legacy modernisation, cyber security and data analytics, among others. Digital is a large US$160-US$200bn market.
3-year roadmap for Infosys: Infosys currently has US$2.8bn of revenues from digital. The outlined strategy with investments in Digital, Go-to-market and capabilities feeds into a 3 – year roadmap (FY19-FY21) to stabilise, build momentum and accelerate growth. Infosys also reiterated their capital allocation policy of returning upto 70% of FCF with periodic review of return cash balances.
Margin guidance maintained: Infosys reiterated their margin guidance of 22%-24%, given the investments they are making in Digital, Sales, US talent model and reskilling. That said, there are potential offsets, to an extent, as management is focussed on improving productivity in the legacy services and drive better bill rates in Digital. The company is tracking the revenue per employee metric closely (up 6.3% YoY in FY18) and will be one of the metrics to track for margin defense.
How do we read the strategy: At the outset the strategy seems more geared towards building a services centric business model, with platform wraparounds as innovation and productivity measures. 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% of sales), but the execution will need a stable leadership.
Valuations and view: We believe that Infosys exit growth momentum has improved vs. last year and the same is reflected in their guidance of 7%-9% USD revenue growth of FY19. The digital investments are necessary, but we do think scale and currency tailwinds (INR depreciation) should provide cushion to margins. Leadership stability and execution on the strategy is the key to regaining investor confidence. As such, valuations of Infosys are undemanding at 15.3x P/E FY20E. Maintain Outperformer.
Infosys is a global technology services company based in India. Co. provides business consulting, technology, engineering and outsourcing services. Co.'s end-to-end business solutions include: Consulting and Systems Integration - consulting, enterprise solutions, systems integration and advanced technologies; Business IT Services - application development and maintenance, independent validation services, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; and Products, business platforms and solutions, including Finacle™, which addresses core banking, mobile banking and e-banking needs of banks worldwide.
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