Infosys Supported By SecularTailwinds
Infosys (NYSE:INFY) is a shining example of trends within the tech industry today. The pandemic proved to the world how important digital and e-commerce are, now businesses around the world are scrambling to stay relevant in the new age. Infosys, as tech services and outsourcing company, is perfectly positioned to ride the wave and it looks like business is accelerating. Based on the Q1 results, a quick look at the charts, and our view of the digital economy we see this stock not only moving higher but moving sharply higher over the next 6 to 18 months.
Record-Setting Results For Infosys
Strong demand across operating segments and geographic regions drove Infosys Q1 revenue and earnings to record levels. The revenue of $3.78 billion is up 21.2% from last year, beat the consensus by 180 basis points, and is a 350 basis point acceleration from the previous quarter's growth. This also is the fifth quarter of accelerating revenue growth since the company hit bottom last year and we don't think it will be the last.
Infosys is headquartered in India and does business internationally so there was an impact from FX on the results. On a constant currency basis the company's revenue is up 16.9% from last year, 4.8% from last quarter, and 18.9% from the same time period In 2019. Notably, the company's core face-to-face business declined by 3% but was more than offset by a 42% year-over-year gain in digital channels. Digital sales grew to 53.9% of sales for the quarter which we think is very significant. Moving forward we expect to see sales in the digital channels remain strong and the bulk of Revenue.
Revenue was also driven by the addition of new clients. The company added 113 new clients or 7.3% bringing the total to over 1,600. The company's total contract volume grew to $2.60 billion and drove an 18.5% increase in free cash flow. The company's operating margin came in a little bit below consensus estimates but the GAAP EPS of $0.17 was still better than what the analysts were looking for. Regardless, the company's revenue strength and business outlook are positive and point to another acceleration (and analyst upgrades) in the FQ2 reporting period.
Infosys Dividend Is Trending Higher
Infosys pays an erratic but attractive dividend that we see growing by double-digits in the coming year. The company's dividend policy is to declare semi-annual payments based on free cash flow and aims to return 85% of that cash flow to shareholders in the form of dividends and share buybacks. While the amount of the payment varies from declaration to declaration, the trend over the last 10 years is positive on an annual basis. Based on the company's results, 18.5% increase in free cash flow, outlook for growth, 122.3% free cash flow conversion rate, and Fortress balance sheet we see absolutely no reason for that trend to change. With shares trading near $1,580 the yield is about 1.7%.
The Technical Outlook: Infosys Is Going Ballistic
Infosys has been trending steadily higher since bottoming last year and it does not look like that trend will end. The Q1 results have price action moving sideways in early action but the bias is definitely bullish. There is a chance for resistance at $1,590 but we don't see it lasting long. Once shares move up to set another new high we expected to see the stock advanced to the $1,900 level.
