This Sleeping IT Stock is Back on Track
Ranu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Indian Blue chip firm Infosys Technologies (NYSE: INFY) has discarded its sluggishness by announcing remarkable growth in its Q3 FY13 earnings and by beating analysts’ expectations. The company reported net income of $434 million against $431 million in the last quarter. Revenue, including Lodestone, rose by 5.8% from a year ago to $1,911 million, and excluding Lodestone revenues posted a 3.7% year-over-year growth at $1,872 million. In spite of the increased operating expenses, Infosys was able to maintain margins through efficiency improvements by focusing on making the right investments for profitable and sustainable growth in the long term. But the significant drivers of robust growth, which attracted my affinity towards this stock, are:
1) 8 big outsourcing deals
With the shift in market share and rising competition from the lower margin vendors, Infosys has changed its strategy in the past few quarters. The company traded off margins to regain market share by chasing large deal flows. Infosys closed 8 large deals (4 in the US, 3 in Europe, and 1 in India) in the quarter (TCV on US $731 million), which further enhances its strong presence in various geographies of the world. North America reported tepid growth of only 1.6% in constant currency, India grew by 44.7% sequentially, and rest of the world grew by 7.4% in constant currency. Europe grew by 14.4% in constant currency because of the Lodestone integration, which strengthens its EMEA and SAP vertical presence. I believe Infosys will gain from learning the IDEA approach of Lodestone in achieving business transformation across the project life cycle.
The major catalyst for winning the 8 deals was its consulting and systems integration business, which grew by 8.1% organically quarter-over-quarter and by 15% when including Lodestone. The Lodestone deal helped ithe company inrease its revenue to 32.6% of the total revenue in 3Q, in comparison to 30.0% in the second quarter. The total contract value of the products and platforms business has touched $600 million, of which over $100 million came in the third quarter. In addition, the company’s Product and Platform Space also had 14 wins across industries and geographies, which are widely adopted by 70 global clients. Pricing has also gone up by 1.8% this quarter due to the faster increase in this business.
The company has signed ~20 transformational deals over the last three quarters and will witness more in the upcoming quarters.
2) Ignition of recovery phase
In my view, the first step towards recovery was made when the company signed deals to improve its US presence – with Harley Davidson and Marsh BPO, which reflects greater willingness by the company for deals that include asset and people transfer as heavier onsite component of revenue. In addition, the closer account management model will also help the company to recoup revenue shares from top 50 accounts. As this model has already worked well for Cognizant Technology Solutions Corporation (NASDAQ: CTSH) and Accenture, I believe that if Infosys is able to replicate the same, it would definitely put the company back on track.
3) Strong Client addition
Another point of attraction- Infosys added 89 clients during the last quarter, and the number of active clients grew to 776 up from 715 in Q2 FY13. This point seems pretty impressive in maintaining the growth momentum of the company.
In spite of the robust Q3 earnings, Infosys is still lagging behind its strongest Indian competitor, Tata Consultancy Services, in many aspects, like Client addition in higher revenue brackets. This area slowed down for Infosys in the past years, whereas TCS added two more $100 million clients, taking the total to 16. TCS' revenue, in dollar terms, rose 3.3% quarter over quarter in comparison with a 6.3% rise at Infosys. Employee count of Infosys -155,629- is also lower than TCS-243,545. In addition to this, attrition rate of employees is also high in the case of Infosys-7,045 (average of the last four quarters). TCS also enjoyed a robust Q3 FY13, reporting a 23% rise in quarterly profit, driven by strong demand for outsourcing services and stable fees. It added 35 new clients during the quarter. I believe that the company will continue to give better results because of the sustained efforts from all operating teams to focus on growth with profitability in the long run. If you are an investor looking for a position in TCS, you can invest in EGShares Technology GEMS ETF (NYSEMKT: QGEM). TCS represents a substantial portion of this fund.
Another industry player, Cognizant, reported strong Q3 earnings. Its net income rose by 22% because of the broad-based revenue growth across its services and geographies. Revenue from North America, Europe, and the rest of the world also rose and positioned the company nicely for long term growth for its investors. The company has signed a few large deals in the last quarter. With Horizon 3, the company is continuously developing offerings in 3 arenas – new technologies, new delivery models, and new markets. Cognizant is expanding its ITIS capability through the creation of a data center cloud services organization, which will offer private and multitenant cloud offerings. Both Infosys and TCS are in the race to bridge the revenue growth rate gap, which in my opinion will surely hinder growth prospects of the company in the years to come. What I like about Cognizant is that it has zero debt on its balance sheet and has accumulated $2.6 billion in cash. While Infosys has seen a significant shuffle in its top management due to the growth concerns, Cognizant has excellent management, which has been leading the company for a long time. Its deeper engagement with its clients is a big threat for its peers to sustain their market shares.
Seeing the growth momentum driven by improving the large deals, strong addition of clients and flexibility to deal structuring, I am highly inclined towards an investment in Infosys, followed by TCS. Additionally, Infosys had reported cash and equivalents of Rs. 15 billion (US $2.7 billion), which it can use in its future financial activities. I see huge potential growth in Infosys, as it is focused on acquiring new clients in new industries, which will further boost its market share.
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