Investment overview
The Indian IT industry has seen challenging times as a global slowdown in multiple sectors over the last several years has impacted the outsourcing business. While growth sustains for some IT majors, the growth momentum has declined and companies are looking for avenues to spur growth.
Infosys Ltd. (INFY, Financial) is among the top names in the Indian IT industry. The company’s stock recently experienced a sharp decline following the exit of CEO Vishal Sikka. Infosys was trading at $15.93 on Aug. 17, but slumped to $14.26 after Sikka's announcement.
While the stock has marginally recovered and currently trades around $14.82, Sikka's resignation still had an impact. Further, other key fundamental factors determine if Infosys remains interesting for long-term exposure.
Negative impact of CEO's exit
As reflected in the stock price deline, Sikka's departure affected the company. While most Indian IT companies operate purely as business processing units, Sikka was seeking to innovate.
In his relatively short stint as CEO, Sikka encouraged innovation (organic and inorganic). This is evident in the fact Infosys made four acquisitions in 2015 and another two in 2017.
Infosys has a cash glut and the acquisitions were intended to integrate new technology into the company’s operations. On May 2, Infosys announced it will be hiring 10,000 American workers over the next two years as a part of an initiative to open four new technology and innovation hubs in the U.S.
With Sikka's exit, the biggest drawback is the continuity in moving toward innovation. I am certainly not suggesting the company's board cannot work to achieve this goal, but Sikka had decades of rich experience in the U.S., which is something the organization is likely to miss.
Cash utilization challenge
As of June 30, Infosys reported cash and equivalents of $5.9 billion. In the coming years, cash utilization is one factor that will determine the stock's direction.
There are several scenarios that could significantly impact the stock price:
First, Infosys announced a share buyback program on Aug. 19. I believe more buybacks are in the cards. While this temporarily provides the stock with support, I do not see share buybacks working in the long term. The key focus is likely to be on growth.
Second, Infosys has paid special dividends in the past and I expect it will continue to distribute them in the future. Special dividends are attractive and Infosys is a quality dividend stock. Again, the key point is to sustain growth and maintain robust cash flows, which will be determined by the company’s growth and innovation strategies.
Third, Infosys continues to pursue acquisitions. The important point to note here is the company's acquisitions have been small. However, the company has the cash buffer for larger acquisitions and, if future acquisitions prove beneficial, I see the stock moving higher. In particular, any acquisition related to the cloud ecosystem, big data, analytics, internet of things engineering services or artificial intelligence can be a potential game changers for Infosys.
Conclusion
Infosys has been a value creator in the past and the company’s fundamentals remain robust. The key challenge will be delivering growth. I believe investors should wait for the next CEO to take over before considering any position in the stock.
While dividends and share repurchases continue to create value in the near term, long-term investors need more reassurance before investing in the company. If innovation-driven growth is visible through aggressive management policies, Infosys will be interesting.
Disclosure: No positons in the stock.
