Why long-term investors should stay invested in Infosys

Infosys under its new leadership seems to be marching ahead in the right direction. A while ago, the company announced its September quarter financials, which were slightly better than the consensus of analysts’ estimates. Moreover, it also issued bonus shares signalling the management’s confidence in the future growth.

However, contrary to the expectation of some analysts, the company did not revise the full year dollar revenue growth guidance of 7-9%. But, that need not disappoint long-term investors.

Here’s why it makes sense to stay invested in the stock if you believe in the long-term, value driven investing:
The bonus issue: Infosys has declared one bonus share for every existing share and 1:1 stock dividend for American Depository Shares. Technically, an issue of a bonus shares does not have any material impact on the shareholder since the share price will be adjusted once the process of allotment of bonus shares begins, i.e. after the record date. But, it does offer an insight into what the management is thinking of the future growth. This is because bonus shares increase the capital base of the company since a chunk of surplus profit in the balance sheet is converted into equity. A company that pays dividends regularly and has a responsible management will do this only when it is confident that it would be able to serve this larger capital base through dividends, and buybacks of shares in the future.

Sustained business momentum in the US and Europe: Growth in these two key markets sustained during the September quarter on a sequential basis. The US grew by 3.1% and Europe by 4.2%. While the growth in the financial services vertical continued to stay tepid at 1.2%, other verticals such as manufacturing and energies, utilities, communications and services was buoyant.

Attrition: Attrition touched a high of 20.1% during the September 2014 quarter compared with 19.5% a quarter ago and 17.3% a year ago. This is expected to decrease in the coming quarters considering the efforts of CEO Vishal Sikka to retain talent. According to recent media reports, the management had undertaken revision of senior management salaries. The company also gave promotions to 12,000 employees during the September quarter apart from giving 100% of variable pay to all employees.

Operating performance: Infosys has been posting subdued growth compared with what some of its bigger and smaller peers have been reporting and also lower than the industry average. This is expected to change albeit slowly. To begin with, the company has been able to keep the fall in its operating margin under check. In the September quarter, it reported a margin of 26.1%, a 100 basis points improvement over the previous quarter. The days for which sales was outstanding were 63, an improvement over 67 days a quarter ago.

Strong cash management: Infosys has over $4.5 billion (close to Rs 28,000 crore) of cash and equivalents. Its cash generation from operations has also remained strong over the years. With focus on growth, the new management is in the process of finding the right opportunities to deploy the cash.