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New initiatives expected to bear fruit by middle of 2015
Infosys has been battling with single-digit dollar revenue growth for the last few years. The current fiscal is not likely to be any different. Analysts expect the company to exit FY15 with an estimated dollar revenue growth of 8 per cent, against TCS' 17.5-18 per cent.
The Street believes Infosys is expected to return to double digit revenue growth in FY15, as new initiatives of the company are expected to bear fruit by the middle of 2015.
Vishal Sikka, CEO of Infosys, has clearly identified the path that will take the company to the next level without disrupting the existing business realities. Efficient allocation of capital is a very critical part of this strategy.
Budget 2015: Complete Coverage
The Panaya acquisition is a step in this direction, with Infosys paying $200 million (six times the company's existing revenues of $33 mn).
The company, which provides applications that reduce the time SAP and Oracle spend during upgrades, testing and maintenance. Panaya is a sooftware as a service that facilitates ERP upgrades and testing.
The company provides automation technology to large enterprise software management. The company has marquee names from the Fortune 500 as clients. Currently, it has 400 active clients, including some names like Coca Cola, Volvo, Mercedes Benz, GM, Bosch, Toyota and Walmart.
The deal may not boost earnings in the near-term, but the market believes the acquisition reflects a changed mindset. Also, new business is expected to be margin accretive by FY16 as the business is a high net margin business (30-33 per cent).
Motilal Oswal Securities says: "It is the biggest event substantiating our belief of improvement in capital allocation through inorganic activity. We believe that the same can co-exist with a much better payout regime, than the current post-tax board-approved 40 per cent."
Budget 2015: Complete Coverage
The company is focused on banking on automation to bring down cost of delivery when it comes to existing businesses and investing in building new capabilities. According to Antique Stock Broking, stability in the top management, coupled with the top-level relationships of Dr Sikka, should enable the company to achieve at least industry-level growth.
Most brokerages are bullish on the company. Though the sector trades at a premium to the Sensex, if one excludes TCS, then the sector's valuation is at a discount to the broader market.
This leaves room for stocks like Infosys to do well if the performance improves in the coming fiscal. According to Nomura, IT is trading in line with its five-year average, although on ex-TCS basis valuations are at 5 per cent discount to average. Infosys is trading at 16.2 times FY16 earnings.
Analysts expect the multiple to expand to 17 times as growth revives in FY16.
