BackWill Infosys’s dream run continue in FY17?
Sikka's statements to employees on 16% revenue growth in FY17 suggests a confidence that Infosys's good run this fiscal year may continue into next year
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Infosys Ltd’s chief executive officer Vishal Sikka has told employees he wants to grow revenue by 16% in 2016-17. That’s materially higher than lobby group Nasscom’s estimate that the industry will grow 10-12% in FY17. But investors shrugged off Sikka’s statement; Infosys shares have been flat in the past two trading sessions.
Internal targets are materially different from a guidance given to investors. An analyst at a multinational brokerage says that Sikka’s statement to employees sounds like good intentions more than anything else. “A statement of intent tends to be more generous than the best case scenario. On the other hand, because guidance is a public commitment to investors, it tends to be far more pragmatic," he said.
Having said that, Sikka’s statements to employees suggests a confidence that Infosys’s good run this fiscal year will continue into the next year. There’s no disputing the fact that the macro environment has become tougher in recent months. If Infosys ends up growing materially higher than the industry next year, it will be because gains from low-hanging fruit will persist.
The above-mentioned analyst says that under its earlier leadership, Infosys had been rigid on pricing and contract structuring, which limited opportunities with some clients who were otherwise sold on the company’s delivery capabilities. Sikka has increased attention to such clients, which has helped growth in the past few quarters. It remains to be seen if gains from such manoeuvres will sustain for some more quarters.
Some analysts argue that there’s more to Infosys’s turnaround than just its ability to pick such low-hanging fruit. Sikka’s standing in the industry has opened new doors, for instance. Analysts at Kotak Institutional Equities say in a 12 January note to clients, “We back Infosys—sustainable measures for a turnaround, healthy revenue momentum in traditional services and likely benefits of automation in the medium term underpin our positive view."
Be that as it may, it will be clearly too much to expect the improvement to be as dramatic as what Infosys has achieved this year. Infosys has bounced back strongly this year—revenue has grown 12.5% in constant currency terms in the first three quarters, and it expects growth in the March quarter to pick up to around 14%. In the last fiscal year, growth was just 7.2% in constant currency. What’s more, its growth is higher than all of its peers except Cognizant Technology Solutions Corp. Most analysts expect it to repeat the feat in FY17, although all of this appears to be priced into Infosys shares.
In the past year, while stocks of peers such as Tata Consultancy Services Ltd (TCS) and HCL Technologies have fallen 16-17%, Infosys shares have been more or less flat. For the outperformance to continue, Sikka’s good intentions about growth next year should translate into results.
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