2023-09-27 10:17:12 ET
Summary
- Infosys Limited faces short-term challenges due to cautious clients in sectors like financial services, mortgages, asset management, and telecom.
- Growth rates have moderated, and revenue growth guidance for the fiscal year has been revised to 1% to 3.5% due to client slowdowns.
- Infosys aims to enhance cost efficiency, automation, and profitability while offering a 2.5% dividend yield, presenting a solid business with a reasonable valuation.
Investment Thesis
Infosys Limited (INFY) is a technology consulting and services company that partners with businesses across diverse industries to help them navigate digital transformation and optimize their operations, to achieve performance through the use of technology, data, and innovative solutions.
Infosys' growth rates have slowed down of late, which is weighing on the stock. That being said, having to pay 18x forward operating profits for this business is a compelling entry point. Particularly given that the stock also carries a 2.5% dividend yield, and the business operates debt-free.
Infosys' Near-Term Prospects
Infosys is an Indian-based, technology consulting and services company that offers a wide range of IT-related solutions to its clients. The company operates in various industries, such as financial services, insurance, retail, consumer packaged goods, logistics, and more all around the world.
Infosys provides consulting services in areas such as Business Transformation, Strategy and Architecture, Supply Chain, Enterprise Processes, Enterprise Applications, and more. They assist clients in defining and delivering technology-enabled transformations of their businesses, optimizing IT strategies, and implementing IT operating models.
In the near term, Infosys has observed some clients in specific sectors exercising caution by slowing down or deferring work on transformation initiatives and discretionary projects. This cautious approach was particularly evident in industries such as financial services, mortgages, asset management, investment banking, and telecom.
Despite these short-term challenges, Infosys continues to secure significant deals, reporting a fiscal Q1 2024 large deal value of $2.3 billion, with a substantial portion representing net new business. Furthermore, Infosys announced a substantial mega deal valued at $2 billion after the close of Q1, indicating a strong trajectory for future growth.
The argument that Infosys makes is that it maintains a healthy pipeline of both large and mega deals, and has ongoing opportunities to expand its client base and revenue streams. The company's strategic investments in generative AI are paying off, with 80 projects underway for clients and a substantial workforce of 40,000 employees trained in generative AI skills. This positions Infosys to meet the rising demand for AI-powered solutions in various industries.
With this in mind, let's discuss Infosys' financials.
Revenue Growth Rates Flatten Out
INFY revenue growth rates reported in constant currency
In essence, Infosys is a mixed-bag investment. There are clearly enticing opportunities in its potential future pipeline, however, for now, its growth rates have moderated.
Together with its fiscal Q4 2023 results (at the start of 2023), Infosys put out the following guidance.
INFY Q4 2023
That would have disappointed investors, particularly given that in the prior fiscal year, Infosys was delivering mid-teen growth rates.
More recently, together with its fiscal Q1 2024 results, Infosys noted that due to some clients slowing down or stopping transformation programs and discretionary work, especially in financial services, asset management, investment banking, and telecom, Infosys has been forced to downwards revise its revenue growth guidance for this fiscal year to 1% to 3.5% in constant currency.
Even if we presume that Infosys is lowballing estimates to allow for a beat later in its fiscal year, we can clearly see that this business is reporting mid-single growth rates even as its comparables with the prior year start to improve with each passing quarter.
Now, let's get to the bull case for this business.
Strong Profitability Profile
Infosys recognizes its more mature growth rates and therefore is committing itself to enhancing its cost efficiency and automation efforts, which together are expected to contribute to margin improvement.
To this end, the company has initiated a comprehensive margin expansion program, targeting areas such as pyramid efficiency, cost reduction, and value generation.
More specifically, Infosys' fiscal Q1 2024 earnings reported an operating margin of 20.8% for the quarter, down 20 basis points from the prior fiscal year. Altogether, this implies that Infosys is priced at approximately 18x this year's operating profits (pre-tax). I believe this is a fair multiple for investors, particularly given that not including its cash dividend payout, Infosys holds about $1.5 billion of cash.
While this cash sum amounts to about 2% of its market cap and is evidently not a large figure, the fact that Infosys has no debt provides the business with ample flexibility and potential options.
The Bottom Line
Infosys is a technology consulting and services company that partners with businesses across diverse industries to help them navigate their digital transformation.
In the near term, Infosys has observed caution among some clients in specific sectors, leading to a slowdown in transformation initiatives and discretionary projects.
However, Infosys continues to secure significant deals, reporting a fiscal Q1 2024 large deal value of $2.3 billion, with a substantial portion representing net new business.
The company's strategic investments in generative AI position it well to meet the rising demand for AI-powered solutions. Despite moderating growth rates and a downward revision in revenue growth guidance for the fiscal year, Infosys is committed to enhancing cost efficiency and automation efforts to improve its profitability profile.
Finally, the business also provides a 2.5% dividend yield. All considered, I believe this is a solid business with a reasonable valuation.
For further details see:
Infosys' Attractive Dividend Yield And Cheap Stock