How achievable is Infosys' FY20 vision?

While announcing the March 2015 quarter results on Friday afternoon, Infosys' management team shared the company’s vision for FY20. Infosys aims to clock in $20 billion annual revenue by FY20 (currently $8.7 billion), improve employee productivity by 50% and take up the company’s EBIT margin to 30% from 25% currently.

Higher revenue contribution from new services such as design thinking, artificial intelligence and intellectual property; increased focus on inorganic growth and higher revenue per employee are the three areas which will help Infosys achieve these targets, according to the management.

“Infosys’ stated targets for FY20 imply about 18% revenue CAGR, 13.6% of which is by renewing existing services, the rest from acquisitions and new services, and margin expansion,” estimate analysts at BNP Paribas. While they believe successful implementation of FY16 targets could lend credibility to future goals and could take the stock price higher, they add that Infosys has guided for a 10-12% constant currency revenue growth in FY16, which appears to be optimistic. They say Infosys’ FY17 as well as FY20 goals look lofty, but are not ruling out a likely radical transformation going forward.

Notably, Infosys’ dollar revenues grew at a compounded annual growth rate (CAGR) of 9.6% over FY11-15. Analysts estimate that the $20 billion target by FY20 implies revenue CAGR of 18%, which is a significant upmove compared to recent revenue growth trend at Infosys.

Further, Infosys management expects traditional business to continue to be under pressure and is hoping that the newer service lines will aid incremental revenue growth. However, while these new areas have high growth potential they also have higher competitive intensity, which means achieving the target may not be easy.

Manik Taneja, IT analyst at Emkay Global terms Infosys’ FY20 targets as “ambitious” and has downgraded the stock to 'Hold' from 'Buy' earlier.

“Infosys’ valuation multiples had improved since the appointment of Sikka as CEO in May 2014 in the hope of Infosys’ recovery (and thereby driving Infosys’ outperformance to peers), however positive outcomes would need to preclude any further stock upsides given modest achievements till date,” he wrote in a post results report on the company.

But some analysts are still fine even if Infosys misses the topline target by a few percentange points.

Shashi Bhusan, IT analyst at Prabhudas Lilladher, says, “Even if Infosys misses the revenue estimate for FY20 by 10%, the company can still achieve 14% plus EPS CAGR over FY15?21. We see both, guidance and vision, ahead of consensus expectation.” He remains bullish on the company.

Overall, analysts remain positive on Infosys. Most analysts polled by Bloomberg post Infosys’ results have a 'Buy' rating on the stock. Their average target price of Rs 2,314 implies upside potential of about 16% from Friday’s closing price of Rs 1,996.