I had written an article yesterday on Infosys (INFY, Financial) about Ken Fisher (Trades, Portfolio) substantially increasing his stake in the company and the company’s long-term growth triggers. I had also recommended that investors can take some exposure to the company before results are declared.
With Infosys declaring stellar results, the stock is higher by almost 10% in Indian stock markets and I expect similar stock price action in US markets later in the day. This article discusses the key positives from the results and the factors that will help Infosys sustain long-term growth.
For 1Q16, Infosys reported revenue growth of 4.5% on a q-o-q basis and this is the highest revenue growth in 15 quarters. For the same period, the volume growth was 5.4%, representing the highest growth in 19 quarters. It is clear from the headline results itself that Infosys is on a higher growth and transformation path, which I elaborated in yesterday’s article.
Besides these headline numbers that will be discounted in the stock price, the company’s guidance for FY16 also increased and I believe that this will trigger sustained upside for Infosys in the coming quarters. While the FY16 revenue guidance was maintained at 10% to 12% in constant currency, it was increased to 7.2% to 9.2% in dollar terms. Investors can therefore expect better quarters ahead and this will trigger positive price action.
There are few more positive points that will translate into strong growth and indicates better health of the company:
- First, quarterly annualized attrition for 1Q16 was 14.2% compared to 23.1% in 1Q15. This is an indication of better employee retention and a sign that the company is doing well.
- Second, gross client addition was robust at 79 with six large deals in 1Q15 having total combined value of $688 million. This is an indication that the company’s focus on innovation is driving client’s growth, which is likely to sustain.
- Third, the company’s cash and equivalents were at $4.7 billion for 1Q16 and this gives Infosys high financial flexibility for more innovation driven acquisitions in the coming quarters.
It is important to mention here that the company’s first acquisition of Panaya in February 2015 is already giving traction to business growth. Post acquisition, the company has won 15 deals through joint service offering with Panaya.
Besides the growth factors that I discussed yesterday, I must add that Infosys has a $500 million innovation fund that will target early stage companies. In my view, this fund can be a game changer for Infosys in the long-term if one of few of the investments is in breakthrough technologies. The key point again is that innovation is the growth delivering trigger for Infosys in the coming years than process driven work.
From a long-term perspective, Infosys is looking at increasing revenue from $8.7 billion currently to $20 billion by 2020. With $1.5 billion targeted from acquisition and $2.0 billion revenue targeted from new technology, I see Infosys moving in the right direction.
In conclusion, Infosys has made the right moves and acquisitions after CEO Vishal Sikka assumed office. Industry body expects India’s IT industry to grow at 12% to 14% this year and Infosys is not far behind with a target of 10% to 12% revenue growth. As innovation driven business gains more traction, I expect Infosys to beat the industry growth rate and this will trigger another re-rating of the stock. Overall, Infosys is a stock worth considering at current levels and worth holding for the next 3-5 years. If the company’s target of $20 billion in revenue by 2020 is achieved, the stock is likely to outperform in index on a consistent basis.
