Infosys (NYSE:INFY) announced its fourth-quarter results in mid-April. It was the digital services and consulting company’s second consecutive quarter of double-digit growth, showing that the transformation it started a year ago is gaining traction and providing a positive catalyst for INFY stock.
The Transformation Agenda
In April 2018, CEO Salil Parekh laid out a three-year transformation plan that entails Infosys transforming itself in three deliberate stages. In the first year, the company was supposed to stabilize the business and invest in its growth. In the second year, INFY was supposed to gain momentum from all the hard work in the first year, and in the final year of the transformation, it planned to grab growth by the throat and take market share from its competition.
“What I plan to drive going forward is to build Infosys for the next ten years and that is what is coming out nicely,” Parekh told the Times of India in an article published on May 3. “We are building a huge reskilling programme for our employees, we are building localization in many different geographies, we are scaling up recruitment in India, we are revitalizing our centers, everything is being changed to agile (methodologies).”
CEOs focus on providing clients with solutions for the long-run, not just the next 6-12 months. They could not care less about Infosys’ margins. That is why Parekh is interested in building a business that’s relevant to its customers. If he does that, higher margins will follow.
Digital Drives INFY Stock Higher
Can Infosys stock get to $20 in 2019? I doubt it. However, I do believe that it could reach that level by the end of 2020 if it continues to expand its digital portfolio.
One area that could continue to drive digital revenues for the company is Finacle, the company’s digital banking solution, which helps financial -services companies provide seamless digital banking services to their customers.
With fintech continuing to be an essential part of financial services innovation and growth, Finacle could meaningfully boost Infosys’ results and Infosys stock.
Actual Results in 2019
In, Q4, Infosys’ revenue rose 11.7% year-over-year.
For the entire year, its top line grew by 7.9% year over year in U.S. dollars. In 2020, based on the midpoint of its guidance, it expects its revenue to grow by 8.5%. Given the momentum it gained over the last two quarters of 2019, I would say that’s a very conservative estimate.
In Q4, the sales of INFY’s digital portfolio surged 41.1% year-over-year and 9.7% sequentially; digital sales accounted for 33.8% of Infosys’ revenue in Q4.
“We have completed the first year of our transformation journey with strong results on multiple dimensions including revenue growth, performance of our digital portfolio, large deal wins, and client metrics,” Parekh stated, according to the company’s Q4 press release. “This is a reflection of our increased client relevance stemming from our focus on digital, positioning, and long-standing client relationships,” the CEO added.
Infosys’ operating margins reached a ten-year peak of over 30% between 2010 and 2013. Since then they’ve fallen into the low 20s. In 2020, the company expects its operating margin to be 22% at the midpoint of its guidance, well below its fiscal 2010 margin of 30.4%.
However, as I stated previously, INFY is building a foundation for profitable growth. In year two of its transformation, investors can expect its sales to continue to grow more quickly than normal with lower margins than it typically generates.
It’s possible the same thing could happen in year three of its transformation. However, in year four and beyond, its margins should expand.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.