2014 was a year of management changes and management exits for Infosys (INFY, Financial). When the company declared its second quarter results today, it was the first indication that Infosys is finally moving towards more stability and focused growth. This article discusses the company’s results and the reasons for considering the stock as a buy after strong quarter results.
For the second quarter ended September 2014, Infosys reported revenue of $2,201 million that represents a 6.5% year-on-year growth in revenue. The Q2 net profit growth was more robust as Infosys reported net profit of $511 million, representing a growth of 33.4% year-on-year. Infosys also reported an EPS of $0.89 per share for the quarter, representing a strong growth of 32.8% year-on-year. Overall, the company’s results beat estimates and the stock surged nearly 7% on the Indian market trade.
In terms of outlook, the company expects the full year revenue growth to be in the range of 7% to 9% and this means that strong quarters will continue for Infosys. This is the first important reason to be bullish on the stock for the next few quarters.
The second reason to be bullish on Infosys is a restively strong dollar and Infosys stands to gain as the rupee depreciates. I believe that this trend will continue as strong employment numbers in the United States can accelerate increase in interest rates. The dollar can therefore remain strong, and this will be positive for Infosys in the foreseeable future.
Another important point that makes me positive on Infosys for the medium to long-term is the fact that the company has $5.4 billion in cash as of September 2014. Infosys will be exploring possibilities to utilize this cash and I believe that it will come in the form of special dividends, share buyback and acquisition over the next 2-3 years. This makes Infosys an exciting stock to consider.
According to the company’s CEO and MD, from the acquisition perspective, the company is looking to acquire companies that add new skills and capabilities, which will accelerate growth. I believe Infosys will be looking beyond the BPO tag in acquiring new capabilities. The company has ample cash to go for some opportunistic acquisitions.
I am also encouraged by Dr. Vishal Sikka’s initial performance with Infosys. Vishal Sikka has already proved his credentials with Infosys beating expectations in the quarter and now Sikka is targeting long-term earnings growth of 15%-18% and an EBIT of 25%-28%. If this is achieved, Infosys is on track for robust growth over the next few years.
The trend in employee addition for Infosys is also positive and I believe that it is an indication of even better times to come. For the first quarter, Infosys added 11,506 gross employees and in the second quarter, the company added 14,255 gross employees. The employee addition has been on the back of 110 new client additions in the first half of the current fiscal year.
For ADS holders in the U.S., I must also add here that Infosys has declared an interim dividend of $0.49 per ADS, and the company has also recommended a bonus issue of one equity share for every equity share held and a stock dividend of one American Depositary Share (ADS) for every ADS held. Through this, the company intends to further increase the liquidity of shares.
In conclusion, Infosys looks to be a good stock to own after the second quarter results confirmed a strong revival in the company’s growth. The MD and CEO’s optimism on the growth prospects along with expectation of healthy margins adds to the positives. I believe that Infosys stock will continue to move higher from these levels and investors can buy the stock at current levels with the medium to long-term investment horizon.
The risk factors that investors need to keep a close eye on is the trend in exchange rates and the GDP growth in Europe and the U.S. A slowdown in GDP growth is expected in Europe and it can have some negative impact on the company’s growth prospects. However, even with these risk factors taken into consideration, Infosys is still a good stock to own.
