Infosys reported fourth-quarter fiscal 2014 results that were in line with guidance but at the lower end of expectations. The company mentioned the tight spending environment as the primary reason for a disappointing fourth-quarter performance and expects the slowdown in sales momentum to continue into the new financial year.
As a result, Infosys has provided a revenue growth guide of 7%-9% for fiscal 2015. Considering the latest results, Morningstar analysts Peter Wahlstrom and Andrew Lange do not expect a meaningful change to their $59 fair value estimate and remain comfortable with the narrow economic moat rating.
For the quarter, revenue grew 7.9% year-over-year and 0.4% quarter-over-quarter. Financial services, high tech, and the energy and telecommunications industries were highlighted as facing tighter budgetary constraints. Additionally, discretionary spending associated with consulting and systems integration faced longer sales cycles. Nevertheless, on a full year basis, revenue growth improved 11.5% and Infosys added 92 net new clients during the year.
On the margin front, fourth-quarter operating margins expanded 50 basis points quarter-over-quarter to 25.5%. Margins are expected to be similar in fiscal 2015 as the firm continues to manage wage inflation and reinvestments closely.
Points to note
- Overall, Infosys will remain a relevant IT services provider. The company continues to develop its new and emerging businesses in cloud, Big Data, and mobility, which gives us confidence. In fact, it signed 20 new deals for cloud and Big Data and 15 new deals for mobility offerings during the quarter.
- With the market being highly competitive, employee retention will be a focal issue going forward. The company has gone some way toward improving attrition with better compensation and hiring practices, yet it is too early to tell how effective this has been.
- The company is moderately undervalued at its current price. However, we would recommend a larger margin of safety before investing.
- Overall, we believe that Infosys' stewardship of shareholder capital is standard.
- Our fair value estimate stays at Rs 3,700 per share.
- Infosys' narrow moat stems from its scale, comprehensive service portfolio, and strong network of clients.
