Overview
Infosys (INFY, Financial) is among the largest information technology service companies in India and has been a value creator in the past. The last 12 months have not be great for Infosys from a stock price perspective however. The stock is down by 12.8% while the S&P 500 has trended higher by nearly 21%.
The hurdles
At the beginning of 2017, Infosys CEO Vishal Sikka warned employees of a challenging road ahead. Sikka's reason for concern was the “lackadaisical” attitude towards greater value creation.
It is important to note that Infosys has traditionally been a process-oriented company, but with cost cutting being a dominant trend among clients, there is need to look beyond process-oriented work to greater value offering.
Further, when Infosys reported fiscal third-quarter 2017 results, the company revised its full-year revenue guidance to 8.4% to 8.8% from 8% to 9% in constant currency terms. This translates into revenue guidance of 7.2% to 7.6% in dollar terms.
The forecast of a challenging road ahead for Infosys coupled with lowering the guidance for fiscal 2017 has set a bearish tone for Infosys.
To elaborate further, Infosys saw the effects of the failed RBS deal in the third quarter, which was one of the key factors of the weaker-than-expected earnings for the quarter. While economic activity remains stable globally, companies have continued to focus on cutting costs.
To retain clients, IT service companies need to provide cost-effective solutions that are in-sync with the latest technology. This is what Sikka intends to work on. It remains to be seen if Infosys can transform into a company that is high on automation and working towards new technologies such as artificial intelligence.
Besides the innovation factor, another potential risk for Infosys is the policy stance of President-elect Donald Trump. In general,Trump has been favoring any moves that create more jobs within the United States. Therefore, as he assumes power, Indian IT service companies will be closely watching his stance on outsourcing.
The positives
While these challenges have impacted the stock in the near term, it would be beneficial to see if Infosys can emerge stronger in terms of growth and innovation in the years to come. If this seems likely, it would make sense to accumulate the stock on any correction.
The biggest positive for Infosys is CEO Sikka. Prior to joining Infosys, Sikka was a member of the executive board of SAP SE (SAP, Financial) and the global managing board, leading all SAP products and innovation globally. Since assuming his role as Infosys' CEO, he has been trying to move the company towards more innovation and being driven by automation. Further, Sikka has been focusing on greater value creation to existing clients through new technology, which can potentially help retail clients in the medium to long term.
The second big positive for Infosys is, as of December 2016, the company had cash and equivalents of $5.2 billion. In the last 12 to 24 months, Infosys has pursued inorganic growth with the objective of integrating new technology into the company’s core business. In my opinion, the company will be using the current cash buffer for further acquisitions. It is also important to note the acquisitions in the past have been small to mid-size transactions. A big acquisition could potentially be in the pipeline and would serve as a major game changer.
Conclusion
Infosys has headwinds due to how quickly the company is adopting new technology and adding value to existing clients. While the last 12 months have been rough on the stock price, I believe Sikka has the ability to deliver results and I would not be surprised if Infosys bounces back from current levels.
I would remain cautiously optimistic however. I recommend gradually accumulating Infosys instead of taking a big plunge. If there is a big acquisition coming for the company, that will be a good time to consider relatively larger positions in the stock.
Disclosure: No positions in the stock.
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