India’s second largest software services company, Infosys (INFY) declared its fourth quarter results today. The company’s fourth quarter and annual results were fairly good. However, there are some concerns along with positives. This article discusses the positives and negatives, which boils down to a neutral view on Infosys in the near-term. Therefore, over the next three months (until first quarter results), the stock movement is likely to be largely range bound.
The Positive Results and Guidance
For the year ended March 2014, Infosys reported revenues of $8,249 million and a net profit of $1.751 billion. While the revenue grew 11.5% year over year, the net income growth was 1.5%.
The first positive factor in the result was that the fourth quarter earnings beat analyst expectations. While the company reported an EPS of $0.85 per share for the quarter, analyst estimates had pegged EPS at $0.79.
Another positive factor in the results was the dividend payout announced by Infosys. The final dividend has been recommended at $0.72 per share by the board of directors. The company’s existing policy was to pay dividends of up to 30% of the post-tax profit. This has, however, been revised and the current dividend payout is 40% of the net profit. With the company’s cash and equivalents position crossing $5 billion during the quarter, the decision on higher dividends was taken.
Infosys has also provided guidance for the fiscal year ending March 2015. The company expected revenue growth of 7% to 9% in dollar terms. Very importantly, Infosys expects no improvement in operating margin for the coming year. It can be considered positive from the perspective that the management believes that growth is the top priority and investments to boost growth can impact the operating margin in the foreseeable future.
One of the major causes of concern is the top-level exits in Infosys in the recent past. There have been nine senior level exits since June 2013, and this is a red-flag. One of the potential reasons is to boost the company’s margin and this is also the reason provided by executive chairman N.R. Narayana Murthy (who incidentally returned to the organization in June 2013). I believe that structural changes in the organization can result in growth being impacted in the near-term. I must add here that the attrition rate in Infosys increased to 18.7% this year compared to 16.3% in the previous year.
The 7% to 9% revenue growth guidance for the next fiscal also seems conservative considering the fact that Infosys clocked double digit growth in the reported financial year. The guidance looks weak considering the fact that NASSCOM has guided for a 13% to 15% growth in the Indian IT sector exports in fiscal year 2015.
This should ideally benefit major Indian IT players like Infosys, TCS and Wipro (WIT). However, a lower guidance implies that Infosys will be a laggard among the IT players as it restructures and tries to create new growth avenues.
Another reason for concern for the Indian IT industry and Infosys is the point that the Indian currency can potentially appreciate over the next one year. The Indian currency was weak on the back of a corrupt government and policy stagnation.
With the government expected to change in May 2014, the Indian currency has already witnessed some rally. Further strength in the currency can impact growth for Infosys and other IT majors.
While there are negatives in the horizon, it is too early to write-off Infosys and the company’s prospects. Infosys has been a value creator for investors for more than a decade. Even now, the company has a robust cash position and strong financial flexibility to grow and reward investors.
That said, the company also has faced few challenges in the near-term. The company’s returning chief executive (N.R. Narayana Murthy) is looking to take some firm steps to cut cost and open possible avenues of growth. Infosys can potentially slip below industry growth rate in the process of re-organizing itself.
It is therefore a good idea to remain in the sidelines for a quarter or two in order to see how the company is progressing. The near-term concern of currency appreciation will also be discounted in the stock over the next one or two quarters.
I therefore have a neutral outlook for Infosys and I believe that this outlook will be revised after the company’s first quarter results. A positive surprise in terms of growth will make the stock interesting again.