In the recent past, I have been bullish on Infosys (INFY, Financial) with the company’s new CEO embarking on a relatively aggressive growth plan coupled with the fact that the company’s cash hoard was likely to be used for inorganic growth.
On February 16, 2015, Infosys announced the acquisition of Panaya Inc at an enterprise value of $200 million. Founded in 2005, Panaya is in the IT and cloud based quality management service. The company has a strong client base that includes Coca-Cola (KO, Financial), Mercedes-Benz and Unilever among others.
According to Infosys, Panaya’s CloudQuality™ suite will enable Infosys to leverage automation for several of its service lines through an agile SaaS model and help mitigate risk, reduce costs and decrease time to market for clients.
The important point that needs to be noted here is that Infosys was looking at acquisitions in new technology and was also looking at acquisitions that would enhance the customer service quality. The acquisition of Panaya addresses both these points. Further, the acquisition, which comes at a cost of $200 million, is a mid-sized acquisition for Infosys that has cash holdings of $5.4 billion as of September 2014.
The reason for mentioning this is to underscore the point that this is just the beginning of the acquisition spree for the company and I expect Infosys to go for several mid-sized or a few large acquisitions in the coming 4-8 quarters.
The acquisitions will provide Infosys with strong inorganic growth trajectory coupled with the fact that customer service will be enhanced along with cost cutting through innovation based acquisitions. I therefore expect Infosys to record strong revenue, EPS and margin expansion in the coming years.
With Infosys looking to move higher in the value chain, I believe that investors can consider this stock with a 2-3 year time horizon even at current levels. Infosys is currently trading at $36.6 and has a 2015 PE of 19.5. Therefore, the stock is certainly not expensive considering the point that the company is targeting long-term earnings growth of 15%-18% and an EBIT of 25%-28%.
In addition to the earnings potential, Infosys also offers a dividend payout of $0.49 per share, which translates into a dividend yield of $1.3%. Further, Infosys does have a history of special dividends and I believe that another special dividend is likely when the company declares its 4Q15 results in April 2015. Therefore, from a shareholder value creation perspective, there is more than one reason to consider exposure to Infosys.
I must also add here that the Indian government has launched a “Digital India” campaign, and this would be positive for IT service providers in the years to come. I expect Infosys to play some role in this Indian government mission, and the implication is relatively robust revenue growth form domestic markets besides strong growth coming from international markets through the organic and inorganic route.
In conclusion, Infosys is certainly an attractive stock to consider at current levels and the stock has the potential to be a portfolio catalyst in the coming years. The company’s cash pile of $5.4 billion is likely to translate into significant EPS expansion and shareholder value creation.
