Infosys (INFY, Financial) is a leading Indian IT services company. Its comprehensive end-to-end business solutions include application development and maintenance, management consulting, enterprise solutions & package implementation, systems integration and business intelligence. The company also offers products, business platforms and solutions to accelerate intellectual property-led innovation.
Over the last five years Infosys’ revenue has increased by 44%. In the same period its EPS has increased by 34%. Going forward, analysts expect the company to post an EPS of 1.79 in FY2016 (Mar.) and EPS of 1.95 in FY2017 (Mar.). Its topline is expected to grow by 6.40% in the current year and 9.50% next year.
Infosys’ stock has corrected ~10% after its last quarter results. The main reason was the company’s disappointing FY2016 guidance. Management guided for the company’s revenue to grow between 6.20% and 8.20%, and its operating margins to decline in FY2016. The main culprit is adverse forex movement which is expected to adversely affect topline growth by 380 bps and operating margins by 100 bps.
However, I believe investors should look beyond this near term headwind and focus on the company’s improving core performance. The company is currently undergoing a turnaround. Dr. Vishal Sikka, who took over as Infosys’ CEO in 2014, has taken several steps to improve company performance. In order to improve the company’s sales performance, he has done organizational realignment which has freed senior management enabling them to focus more on business development and client relationship. The company is also taking specific initiative to improve client facing functions by streamline sales functions, unifying delivery and by redesigning other fee and oral processes. Management is also making systematic innovation an imperative in every project by giving a specific pipeline innovation agenda to every project manager. More than 1,700 of projects have already followed this.
One of the major problems for Infosys before Dr. Vishal Sikka took over was employee attrition. In order to contain attrition, the company has increased its investment in training and employee engagement. Management has also as declared 100% bonus payout in second and third quarter of the last year. This has helped the company bring down the annualized attrition from 23.4% in 1QFY2015 to 13.4% in 4QFY2015. In terms of employee exits, attrition rate has been reduced by ~50% from May 2014 (2850 exits) to March 2015 (1352 exits). Lower attrition will increase client confidence in the company and help accelerate its growth.
Infosys is trading at forward P/E of 16.03 and has a dividend yield of 1.6%. According to Gurufocus DCF calculator the company has business predictability rating of 4.5 star and margin of safety of 35%.
I believe Infosys is a good buy at current levels given its low valuations.
