Infy at $20 bn: What drives Sikka's aspiration?

Infosys has to grow 18% at a compounded annual rate between now and 2020 to hit Vishal Sikka's aspirational goal. Can the one-time industry bellwether

Infosys CEO Vishal Sikka put up a brave front of optimism during the recent quarterly results announcements at Chennai by setting a $20-billion revenue target by 2020. By doing so, he seemed to signal that he was undaunted by the fall in the company’s net profit and revenue targets and the ongoing challenges faced by software services companies.

But is this a realistic goal? And where will this growth come from? Deccan Herald parsed the statements of the Infosys chief executive and spoke to a few analysts to get a better picture. Senior Research Analyst at Emkay Global Financial Services, Manik Taneja, found the company’s target too ambitious. “They will have to achieve  a compounded annual growth rate (CAGR) of 18 per cent to reach the target of $20 billion revenues by 2020,” said Taneja.

To put matters in perspective, in the just concluded 2014-15 fiscal year, Infosys grew its revenues for the full year by just 5.6 per cent to $8.711 billion. As per information given in the Infosys website, the company registered a CAGR of 12 per cent for the past five years.

A 2,50,000-strong firm

To be sure, Sikka had made it clear during the press briefing that the $20-billion target was an aspirational goal, and not a financial forecast. “It is simply quite far out so we don’t have operational planning, visibility into something that far out. But this is the direction that we are steering the company towards,” he said.

But he did break the target down to its components, and said the $20 billion could be achieved with a 30 per cent margin at an employee count of 2,50,000 and a revenue per employee (RPE) target of $80,000. He also said RPE was currently at $52,300. Sikka said the company may add about 70,000 employees by 2020, taking the total headcount to 2,50,000 from the current 1,76,000.

Sikka also gave an overview of where some of the revenues are going to come from. “Roughly $1.5 billion of that would be contributed by acquisitions that we would make in new areas between now and then,” he said. Is this confirmation that Infosys won’t be shopping for revenues, given its huge cash pile? Shashi Bhushan, senior research analyst at Prabhudas Liladhar, seems to think so.

“I strongly believe that Infosys will not go for acquisitions that will help in revenue generation. Also, that would not be a right strategy for a services company like Infosys under Sikka who is more known for his product development,” he said.

Sikka also said 10 per cent of the $20 billion, i.e. $2 billion, would come from new services in Open Source, Big Data, Artificial Intelligence (AI), and Design Thinking. The CEO said already 25,000 Infoscions had been trained in Design Thinking. Every quarter, some 2,700 are being trained in Open Source and 500 in AI, he said. Regarding Open Source, he said it was seeing massive adoption, from where it was once not allowed inside Infosys.

The CEO said there were currently 250, high value, high margin projects in new services, even though their revenues were not material enough to be reported separately. Of these, 100 were in Design Thinking, and 30 in advanced AI, he said.

Again, Sikka also said he expects the Finacle business to generate $1 billion annually by 2020. It fetched $75 million revenues in the fourth quarter, at an annual run rate of $300 million. Considering its constant currency growth of 15 per cent and the fact that it covers a fifth of the world banking population as affirmed by Sikka, the target looks reasonable.
Even though it was recently folded into EdgeVerve, Finacle’s revenues are calculated along with the banking, financial services, and insurance vertical, which account for over a third of Infosys’ $8.7 billion revenues.

Recently, Infosys made the Finacle suite of solutions available on Microsoft Azure, the Redmont giant’s cloud offering. This will allow banks to utilise Finacle’s solutions while on Azure, and should expand the former’s reach.Apart from identifying these growth areas, the company has ramped up its sales and support team by 800 people in the past one year to combat pricing pressure and muted growth in the energy, telecom, and insurance verticals.

Plenty of challenges ahead

Despite all this, some things do not add up. To reach an RPE of $80,000 by 2020 from the current $52,300, the required CAGR is 8.87 per cent. This is an arduous task considering productivity just inched up 0.77 per cent from an RPE of $51,900 last year to $52,300 this year. Also, while the $20-billion goal is being described as aspirational, the addition of 70,000 people to the rolls by 2020 looks factual considering that net additions this year were to the tune of 15,782.

This doesn’t gel with the consensus that automation will lead to considerable reduction in headcount. Only recently, Wipro CEO T K Kurien was quoted as saying that it is targeting an automation-led headcount reduction of 47,000 in three years. Automation is pivotal to Sikka’s renew-new strategy. So it seems counter-intuitive that he is going in a reverse direction with headcount.

‘Ahead of consensus views’

Shashi Bhushan of Prabhudas Liladhar described the challenges starkly. “Management was confident of achieving 10-12 per cent year-on-year constant currency growth (USD terms 6.2-8.2 per cent YoY), implying 2.8-3.6 per cent CQGR. Moreover, aspiration for 2020 to achieve $20 billion in revenues with margin of 30 per cent includes productivity improvement to $80K/person (from $53K/person in FY15); $1.5 billion contribution from inorganic initiatives; and $2 billion from newer technologies.

“Even with a margin error of 10 per cent on vision execution, this implies 14 per cent-plus EPS CAGR (FY15-21E). We see both, guidance and vision, ahead of consensus expectations. Moreover, Infosys’ aspiration to return to industry leading growth in FY17 (articulated by N R Narayana Murthy) is still intact.”

At the April 24 press meet, Sikka was specifically asked to give a realistic revenue target if the $20-billion goal was just aspirational. He retorted, “If in life we don’t aspire to get what our target is, then what is the point?” Thousands of Infosys shareholders and employees, and indeed the whole information technology industry, is hoping that he delivers on his aspiration.

The path to $20 bn

Acquisitions    :    $1.5 bn
New Services    :    $2 bn
Finacle    :    $1 bn
Revenue Per
Employee    :    $80,000

Source of additional revenues listed by Vishal Sikka