Over the years, Infosys (INFY, Financial) has been a value creator, and the company still has the potential to deliver stellar returns in the near term and in the long term.
It is worth considering before the company declares fourth-quarter results on April 16. While this is a near-term trading idea, investors can consider long-term exposure to Infosys at current levels.
The expectation of a strong fourth quarter is the first reason to be bullish on Infosys. When Infosys reported third-quarter results, the company revised fiscal year 2016 guidance on the upside; with favorable exchange rates, Infosys is likely to deliver strong results. Therefore, strong numbers will trigger stock upside for Infosys in the near term.
The second reason to be bullish on Infosys for the near term is the likelihood of robust dividends to be declared along with strong results. As of December 2015, Infosys had cash of $4.8 billion, and the company cash glut is likely to be used for paying special dividends. In 2015, Infosys paid special dividends, and I expect that even for fiscal year 2016. Therefore, besides stock upside on strong results, investors are likely to gain from robust dividends.
The third reason to be bullish on Infosys before results is the likelihood of strong initial guidance for fiscal year 2017. The company’s guidance for fiscal year 2017 will be boosted by the following factors:
- I expect the dollar to remain strong against the rupee, and this will provide strong earnings momentum in fiscal year 2017.
- Infosys has acquired several innovation-driven companies recently and as these companies integrate to offer higher quality service to clients, I expect greater client acquisition in fiscal year 2017.
- Infosys still has a cash glut of $4.8 billion, and I expect several acquisitions in fiscal year 2017 as well.
With these factors in mind, Infosys is certainly worth considering for the next three to six months for investors looking for medium-term trading opportunities. However, as I mentioned earlier, Infosys is also an excellent stock for investors considering exposure with a three- to five-year investment horizon.
Infosys is no longer a traditional outsourcing company with Vishal Sikka focused on innovation to drive growth. While the revenue from outsourcing the business model does not change, Infosys is trying to deliver better service and experience to clients using the latest technology and innovation. This is the reason for believing that Infosys will survive and flourish in the coming years. In particular, Infosys is focusing on artificial intelligence, and this can add value in the long term.
While there are several positives, I would like to mention that potential slowdown in the U.S. and Europe can be a challenge for Infosys. If weak GDP growth continues in these regions, Infosys is likely to see softer pricing in new contracts and potentially in existing contracts. However, if Infosys is successful in delivering better value to clients through innovation push, the pricing factor is unlikely to be a risk.
Infosys has several upside triggers in the near term, and it is entirely likely that the stock trades 10% to 15% higher in the next two to three months. Further, Infosys will continue to deliver strong results beyond fourth-quarter 2016, and I expect inorganic growth to be a major growth driver in the coming years.
Disclosure: No positions in the stock.
