Ken Fisher (Trades, Portfolio) of Fisher Asset Management has substantially increased stake in Infosys (INFY, Financial) according to the latest regulatory filing and the Real Time Update available from GuruFocus. Fisher has increased his stake by 139.2% to 21,667,231 shares at an average price of $16.26.
I also have a bullish view on Infosys and this article discusses the reasons to be optimistic on the company. Infosys will be declaring its 1Q15 results on July 21, 2015 and I believe that investors can also look for some near-term exposure in today’s trade.
I believe that there are two key themes to the Infosys growth story in the coming years, and this involves innovation driven organic growth and strategic acquisitions that further act as a catalyst to organic growth.
In particular, Infosys has been actively scouting for acquisitions in FY15 with the company having $5.2 billion in cash and equivalents that can be deployed for incremental EPS impact. In February 2015, Infosys acquired New Jersey-based automation technology firm Panaya for $200 million. In April 2015, Infosys acquired Kallidus (also known as Skava) for $120 million.
Infosys is also looking for bigger acquisitions and the company’s focus is on new technology companies such as in the field of design thinking and artificial intelligence. The key point is that these new technologies will be the company’s revenue and EPS drivers in the years to come and these acquisitions will also give Infosys the edge as compared to peers such as Wipro (WIT, Financial) and Tata Consultancy Services (TCS, Financial).
It is important to mention here that the company’s next generation business model involves AI, design thinking and innovation. While the impact of these initiatives is still to be seen on revenue, the company’s revenue from consulting and system integration has already increased to 32.5% of total revenue in FY15 as compared to 24.4% in FY10. With these acquisitions and client value adding initiatives, I expect robust client addition, further increase in consulting based revenue and an increase in revenue per client.
From a valuation perspective, Infosys currently trades at a forward PE (March 2017) of 16.2 and even if EPS growth ranges between 10% and 15%, the company is attractively valued considering the fact that Infosys is paying a dividend of $0.46 per share, translating into a dividend yield of 3.0% at current market price of $15.8 per share. In addition, Infosys has a ROCE and ROIC of 33.8% and 52.4%, respectively. The stock is therefore excellent to hold from a long-term perspective.
In terms of risks, I believe that wage inflation is likely to be one factor that will impact margins in the coming years. Besides the overall inflation factor that translates into higher wages, the acquisition of better talent pool for innovation driven business will impact wage inflation. However, this factor can be offset by business that generates higher margin because of the quality of work executed. Currently volatility is another risk factor, but the Indian rupee has been relatively stable in the last 12 months. Economic uncertainty can be a risk as well as an opportunity as outsourcing is likely to benefit with US and European companies outsourcing to lower their operating cost. However, continued sluggish growth in advanced economies can lower the pace of new client acquisition. For Infosys, this factor will be offset by an increase in innovation driven work.
In conclusion, Infosys has been a shareholder value creator for over a decade and with CEO Vishal Sikka, the company has entered into a new phase of growth that will be driven by new age technology and innovation than just process driven work. The company is still at an early stage of implementation of next stage growth and I believe that strong growth is likely for Infosys in the coming years.
In the next 3-4 quarters, I expect few mid-size acquisitions or a large acquisition and that will keep the positive momentum for Infosys going. In addition, I also expect strong increase in dividends considering the fact that Infosys has been generating robust FCF and the company has cash of $5.2 billion to enhance shareholder rewards.
