I have been bullish on Infosys (INFY, Financial) in the past, and I recommended exposure to the stock before the company released fourth-quarter 2016 results. It was pleasing to see Infosys surge by 8.4%, and the stock is already higher by 19.4% for year-to-date 2016. Exposure to the stock at these levels is recommended for investors with an investing horizon of six to 12 months.
Coming to the reason for the recent rally, Infosys reported strong fourth-quarter 2016 and fiscal-year 2016 results and has provided robust guidance for fiscal-year 2017; this has triggered the rally for the stock. For fiscal-year 2016, Infosys reported a healthy 9.1% increase in revenue with operating profit growth at 5.2% for the same period.
From a stock upside perspective, the important point to note is that Infosys expects 11.8% to 13.8% revenue growth in U.S. dollar terms for fiscal-year 2017, and that implies that revenue growth will accelerate for Infosys. As Infosys focuses on transformation toward innovation-driven growth, the company’s revenue growth trajectory will remain robust, and operating margins will also improve over time.
The company’s transformation toward innovation-driven growth is reflected from the following statement coming from Infosys in its fourth-quarter 2016 results:
“This quarter we made significant advances in our strategy to deliver automation and innovation through our traditional and new service offerings, our platforms and tools and through investments in the broader ecosystem – enabling us to create more depth in existing client relationships, win more deals and specifically large deals and open up entirely new types of strategic projects for Infosys.”
Besides the point that focus on innovation will drive growth for Infosys in the next three to five years, the company’s cash and equivalents of $5.2 billion as of March is another key growth driver. Infosys has made some acquisitions recently, and all acquisitions have been made with the objective of acquiring new technology. While the acquisitions have been small or midsized, Infosys has the financial muscles to make a bigger acquisition, and I see that coming in the next 12 to 24 months. This will ensure that strong growth momentum continues for Infosys beyond fiscal-year 2017.
Another factor that will continue to drive stable growth for Infosys is the exchange rate factor, and the rupee probably will remain in the range of 65 to 70 against the dollar. Further, it is also important to note that Infosys is delivering greater value to the client through innovation, and this factor will ensure that project inflow remains robust even if the rupee strengthens against the dollar on any potential economic weakness in the U.S.
Another reason to consider Infosys is the company’s dividends, which I expect to increase in the coming years. For fourth-quarter 2016, Infosys declared a robust dividend of 22 cents per share, and with the cash glut, there is significant room to pay higher dividends on strong revenue and earnings growth. While Infosys is still not a dividend stock, payouts should be attractive in the years to come.
Infosys is worth considering at current levels, and the stock can deliver another 15% to 20% in returns in the next 12 months. While broad market weakness can be an offsetting factor in the near term, I remain bullish on Infosys even for the next three to five years.
Disclosure: No positions in the stock.
