Infosys: Solid progress on metrics important for turnaround :: Kotak Sec, links

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Solid progress on metrics important for turnaround. The encompassing theme at
Infosys’ analyst meet was ‘renew the core (traditional services) and innovate in new
businesses’. Achieving the strategic roadmap will require investments, specifics of which
and associated impact on margins will be shared in April 2015. We picked up
encouraging progress on key metrics important for growth acceleration. We incorporate
KIE economist’s revised Re/USD rate, resulting in 1-5% EPS increase for FY2015-17E.
TP increases to `2,350 due to rollover to September 2016 earnings and EPS upgrade.

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Renew the core, innovate in new businesses—the overriding theme at Infosys’ analyst meet
Infosys provided further insights into the duality of business, i.e. renew the core and innovate in
new businesses. At the heart of this approach is to run with a dual mandate of client
requirement, i.e. efficiency and newer service delivery models for savings in traditional areas
that can be used to fund new initiatives for clients. We find Infosys’ approach credible as it
rightly places emphasis on digital/new technology initiatives without losing sight of traditional
services. Infosys emphasized that traditional services will be renewed using automation, AI and
design thinking. Infosys provided fascinating case studies using the new approach. Infosys
indicated that these are critical steps for a next-generation IT services company that can deliver
revenue growth of 15-18% and EBIT margin of 25-28%.
Infosys is making good progress on metrics we closely track to assess turnaround
Infosys has taken encouraging steps, in our oft-highlighted areas, important for a turnaround—
(1) investments in S&M and sales effectiveness measures, (2) reduction in attrition and
(3) growth in high-potential IMS and BPO. Successful implementation of the three factors will
partly translate into progression of clients across various size buckets, the fourth important
measure for a turnaround. Infosys has hired 207 people in sales and moved 150 people from
delivery to account management roles. The company has spent aggressively in sales training,
used consultants for enhancing proposal quality and made several interventions to retain sales
talent, all of which are important to improve sales effectiveness. The company is now more
flexible in pricing and open to different deal structures in large deals, especially in IMS. Its
headcount in IMS has increased by about 30% in the past two quarters.
Financial implications of new strategy in April 2015; we believe it will not be disruptive
Management will communicate short-term financial targets resulting from the new strategy in
April 2015. We believe that Infosys has sufficient growth and cost-optimization levers to fund this
without being disruptive in margins. KIE economist has revised FY2015-17E Re/USD rate to 61-65
from 61-63 earlier. This results in 0.5-5.2% EPS upgrade for FY2015-17E. Roll over to September
2016E earnings combined with EPS upgrade results in 11% revision in TP to `2,350. ADD.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily05122014da.pdf