I have been positive on the long-term outlook for Infosys (INFY, Financial) ever since Vishal Sikka took over as the new CEO and managing director. The company’s latest results (third quarter 2015) are robust, and I maintain my positive view on the stock. This article discusses the key positives in the results and the reasons to remain positive on the stock for the long-term.
Infosys reported revenue of $2,218 million for 3Q15, representing a jump of 5.6% y-o-y. The company’s net profit was robust at $522 million for the quarter, representing a jump of 12.7% y-o-y. The growth in the company’s net profit came from a 170 basis points margin expansion on a y-o-y basis. Finally, the company’s EPS growth on a y-o-y basis was 12.2% to $0.46 per share. Overall, Infosys reported strong set of numbers that beat the street estimates. It was therefore not surprising to see Infosys surge by 5% in the Indian markets.
Coming to the other positives, Infosys boosted its cash and equivalents position to $5.5 billion as of December 2014. This is a big positive factor and I believe that Infosys will be looking for some big acquisitions over the next few years. The management remains undecided on the option of share repurchase, and I believe that acquisition would be a better value creation strategy than share repurchase at this point of time.
Another important point to mention here is that Infosys has expanded its innovation fund from the current $100 million to $500 million. The innovation fund is intended to invest in new technologies such as artificial intelligence, automation, internet of things, collaboration and design. Therefore, Infosys is trying to make a move from just a process oriented company to a company that has greater level of innovation driven growth. I believe this is an excellent strategy as process driven growth is not sustainable over the long-term and shareholder value creation will come primarily from innovation driven growth.
While the company’s 3Q15 revenue growth came at 7.9% y-o-y, Infosys has maintained its FY15 revenue growth guidance of 7% to 9%. There was fear among analyst that the growth guidance might be revised on the downside. With no revision to the guidance for FY15, I expect the stock to continue to trend higher in the coming months.
Apart from the results and guidance, I am also positive on Infosys due to the recent decline in rupee as compared to the dollar. A weaker rupee is positive for the Indian IT sector and can help in margin expansion in the coming quarters. With the dollar likely to remain strong in the coming months, the rupee weakness is another positive factor to consider exposure to Infosys.
Besides the stock upside factor, Infosys also offers a dividend payout of $0.49 and a current dividend yield of 1.6%. In March 2015, I expect the company to pay higher dividends on strong revenue growth coupled with the objective of shareholder value creation by utilizing the cash glut. Therefore, dividends are another reason to consider Infosys.
In conclusion, Infosys is in a transformative stage and the company has been delivering well in terms of results. I expect a lot more positive news from the company in terms of dividends, acquisitions and strong growth in the coming quarters. This makes Infosys an interesting stock to consider at current levels.
