Three reasons to finally feel optimistic about Infosys

January 11, 2013
January 11, 2013

Indian IT major, Infosys, beat street expectations and announced a jump in revenues of 5.8% (compared to the same quarter last year) to $1.91 billion. The stock posted its single biggest gain in a day in nearly a decade, closing 16.9% higher than yesterday’s close. This is the first time in eight quarters that Infosys has reported a growth in revenues.

There are, in essence, three reasons for the sudden optimism about the company’s prospects.

1. Most significant, management has now revised upwards its revenue forecast for the fiscal year. It now hopes to shore up revenues of $7.45 billion this year against the earlier estimate of $7.34 billion, 6.5% growth year-on-year (including revenues from Swiss consulting company, Lodestone, which Infosys acquired in September 2012).

“We have done well in this quarter despite an uncertain environment. We continue to gain confidence from a strong pipeline of large deals,” said CEO and managing director S.D. Shibulal. However, it must be noted that net profit dipped by 5.2% this quarter to $434 million. The chairman of the company,  K.V. Kamath, said that green shoots were visible for Indian IT companies, signaling the end  of two years of muted growth.

Analysts concur that the company’s revenues are likely to stay positive. “Importantly, Infosys is maintaining a 3%+ organic revenue growth guidance even for the March quarter, which suggests that some momentum is coming back in the business,” said Nimish Joshi, an analyst with CLSA.

Infosys American Depositary Shares (ADS) have started trading on the New York Stock Exchange (NYSE) under the ticker symbol “INFY.” The company is in the process of listing its ADS on the Paris and London exchanges of NYSE Euronext.

2. Infosys has been able to sign on eight large new clients during the quarter, which are worth $731 million. Overall, the company has added 53 new clients between October and December 2012. Analysts view this as a key factor in Infosys’ future prospects yet they raise concerns that a significant number of these new accounts may have been signed on at lower prices.

After a meeting with the company last month, JP Morgan analysts Viju George and Amit Sharma said that the company’s head of sales and marketing explicitly confirmed that the company has turned aggressive on pricing to drive volume growth, especially in the traditional IT services.

3. Today’s announcement suggests that the new strategy of the company, termed Infosys 3.0, has begun to show benefits. Under Infosys 3.0, the company has decided to focus on high-end consulting business against low-value software development services. While it is easier for the company to get more low-end deals, it decided that profitability of these deals is eroding. But it has not been able to secure a significant number of high-end consulting and business transformation projects as it had hoped. This took a toll on revenues and share prices. The company gave way to TCS (Tata) and Cognizant Technologies as the highest valued IT companies in India. The acquisition of Lodestone is expected to help Infosys implement its new strategy and early signs indicate that it has.

Infosys’ earning results saw other IT stocks like Wipro and TCS going up. But, whether this is a sign that all Indian IT majors are witnessing a turnaround will only be confirmed after TCS announces its results on Jan. 14 and Wipro on Jan. 18.

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