Infosys management indicated that the challenges to growth were more internal rather than external, as it would take time for the company to absorb the recent organisational changes, finds Nomura

Infosys indicated that despite the improvement in the demand environment it’s near term revenue growth will still be choppy, says Nomura in a research note based on interaction with the management of the company. This is for two reasons: 1) 3Q and 4Q are seasonally weak quarters due to the holiday season; and 2) impact on revenues from recent internal changes viz. a) creation of five new P&L units, b) consolidating Lodestone into Consulting and System Integration, and c) ongoing cost rationalization, all of which have led to people movement across the company.

According to Nomura, Infosys management indicated that the challenges to growth were more internal rather than external, as it would take time for the company to absorb the recent organizational changes. There has not been any impact from the senior management exits, however, as Infosys has expanded its leadership team by promoting several executives to more than fill the gap caused by the exits, according to management, reports the research note.

Productivity improvement is likely to play an important role in improvement in margins for the company, reports the research note.  Infosys sees bigger returns from this lever, by increasing offshore revenue mix and reducing onsite costs by right sizing role ratios. However, these changes are likely to be gradual and over the medium to long term, as internal teams have to be comfortable with the changes. Also, Infosys will have to continue to make investments in the business to increase margin profile. Infosys is clear that they cannot afford to remain below industry in revenue growth.

According to the research note, Infosys is likely to do well in the following market segments: manufacturing and retail, telecom, consulting and system integration, healthcare and financial services. Infosys has seen a significant uptick in win ratios in Infrastructure management services (IMS) and has won end-to-end deals consisting largely of IMS.

On stock market performance of Infosys, Nomura has reiterated its ‘Buy’ rating on account of the company’s return to near industry growth rates. This is likely to be maintained with: traction improving in the commoditised segments where it was lagging peers; and upside possibilities from a pick-up in discretionary spending. Margin upsides at Infosys are also likely from cost-optimisation initiatives. Nomura expects near-term stock performance to be driven by margins rather than significant growth in revenues.