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Infosys: 40% Upside Driven By Successful Turnaround

Feb. 05, 2019 8:00 AM ETInfosys Limited (INFY)7 Comments
Anuj Dhawan profile picture
Anuj Dhawan


  • 3Q19 results seem to be giving early indications of the company’s plans gaining traction.
  • Infosys’ increasing interest in Asia points towards the management focus on diversifying the company’s revenue concentration.
  • The company’s willingness to invest and turn around deals gone sour further points towards depth in management ability.
  • Leveraging the momentum in digital, Infosys appears on track for a re-rating in P/E.
  • If the company can sustain its growth trajectory, over the next 12-18 months, the stock can return ~40%.

Infosys (NYSE:INFY) has been climbing out of a chasm of investor perception. Over the last 18 months, the company has been making significant strides in getting back to its ways of beating guidance. The results of the last few quarters and momentum in deals won point towards INFY on a sustainable growth trajectory. Absent management issues, the company’s stock looks undervalued.

3Q19 Results

Other than the usual suspects (European weakness in financial services, weakness in communication and life sciences), INFY’s 3Q19 results were quite strong. The company’s ability to capture an increasing proportion of client budgets on digital spending appears to have helped.

Source: INFY Financial Model. Note: The INFY Financial Model has been developed by the author using SEC filings, the company's investor disclosures and competitor analysis.

On the back of the momentum seen, the company also increased its revenue guidance from 6-8% growth in constant currency to 8.5-9% growth in constant currency while maintaining its operating margin guidance of 22% to 24% for the full year.

The intriguing part about INFY’s guidance was the company maintaining the operating margin guidance despite Digital seems to be driving growth (+5% q/q, 33% y/y) – Digital is known to have gross margins a couple of points higher than the rest of the business.

[Abhishek Bhandari from Macquarie] When the 9 months margin has been 23.4%, we have let the full year guidance unchanged at 22 to 24. That leaves a very wide range for the fourth quarter

[Joseph Foresi from Cantor Fitzgerald] People have tried to ask you about margins long-term, probably about six or seven different ways on this call. Why don't you seem to give long-term outlooks on margins or next year's outlook on margins.

Source: 3Q19 Earnings Call

Evidently, the market senses INFY’s conservativism despite things starting to

This article was written by

Anuj Dhawan profile picture
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Analyst’s Disclosure: I am/we are long INFY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (7)

Thanks for the article. Very good points. It would be nice if the risks and the company's position vis a vis competition in digital are also covered.
Anuj Dhawan profile picture
Thank you for the comment. INFY is in the outsourcing/consulting space and the biggest risks are those of attrition at the senior levels (which also lead to loss of business) and consequent loss of market share. INFY has been witnessing a major exodus in the past, but that seems to have cooled off to some extent. Also, the company's push to integrate sales specialists in large digital accounts to sustainably grow them is the ploy the big consults have employed successfully for a while. Coupled with the portfolio additions in digital and a stable management, the company's win rates could begin to meanigfully outpace that of competition.
Anuj Dhawan profile picture
Also note:

"Effective from Financial Year 2018, the Company's policy is to payout up to 70% of the free cash flow of the corresponding Financial Year in such manner (including by way of dividend and / or share buyback) as may be decided by the Board from time to time, subject to applicable laws and requisite approvals, if any. Free cash flow is defined as net cash provided by operating activities less capital expenditure as per the consolidated statement of cash flows prepared under IFRS. Dividend payout includes dividend distribution tax."

So if INFY can continue executing on the plan outlined, the dividend is likely to grow.
I am really confused by the dividend yield. Is it really 1.5%? Have they cut the yield or this is the effect coming from splitting the stock?
Anuj Dhawan profile picture
For 9M18, INFY has paid $0.34 of dividend which translates into ~3.1% yield for the period. Annualizing it makes the yield cross 4%.
asparagii profile picture
Thanks for the article Anuj.
Anuj Dhawan profile picture
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