For the most part of the last two years, Infosys has seemed unable to cope with the new global realities. It could not keep pace with its sales outlook and stopped giving quarterly guidance citing global uncertainties. However, many analysts now seem to agree that the worst may be over for India's second largest IT outsourcer. The stock closed above the Rs 3,000 mark after a gap of nearly two years on Thursday, after having last closed above the level on April 13, 2011.
Here are 10 reasons why the stock hit a two-year high
- Underowned, undervalued: By December 2012, Infosys shares were trading near their 52-week lows. In a note, Bank of America Merrill Lynch said Infosys is among the most under-owned, under-valued and under-performing stocks in the Indian markets. Sensing value, long-term investors started accumulating Infosys shares.
- Earnings surprise: The biggest trigger for Infosys came in January when the company announced its December quarter earnings. Against expectations, Infosys raised its full year sales outlook to $7.45 billion from $7.34 billion, implying a growth of 6.6 per cent year-on-year. The stock gained as much as 17 per cent on the day the results were announced.
- Overweight IT: The latest shot in the arm for Infosys came from the post-Budget shift by large funds into defensives such as IT services. IT stocks have outperformed the broader Nifty benchmark over the last week. On the BSE too, the IT index is up 4 per cent over the last week since the Budget compared with a 2 per cent gain in the Sensex.
- Flexibility in pricing deals: December quarter earnings indicated that Infosys was more flexible in winning deals, embracing "a more realistic" margin profile, Bank of America Merrill Lynch said in a report recently.
- Successful internal re-organization: The efforts put in by the management on an internal re-organization have started to show up. "...the strategy is over, the structure is over, the leadership is over, the planning we have put back in place, we have prepared ourselves for next year by adjusting some of the line items," chief executive officer S. D. Shibulal has said in an interaction with Morgan Stanley.
- Proactive management: The Infosys management, led by CEO Shibulal, has been more proactive in addressing investors' concern recently. The CEO recently met Morgan Stanley analyst Vipin Khare and explained the company's strategy to investors in great detail (Read full transcript here).
- Demand for IT services set to rise: Analysts say Infosys will witness "disproportionate benefit" whenever the demand environment for IT services picks up. That's because 34 per cent of Infosys' sales comes from discretionary spending. Another 34 per cent comes from financial services, which continue to face headwinds. The company won 13 new deals in Europe in the December quarter, and the trend might continue across geographies.
- Utilization rates have bottomed out: Unproductive employees, warming the bench, have been a drag on Infosys' productivity. Increasing demand will push up utilization. "Because we have not added people at the bottom, the pyramid spectrum has become a little narrower, and that will increase our average cost per employee," Mr Shibulal said in his interaction with Morgan Stanley.
- Re-engaging with employees: Infosys, once the favourite destination for IT graduates, had been in the headlines for all the wrong reasons - from delaying joining dates of new employees to laying off unproductive ones. But in the third quarter, Infosys announced salary hikes for employees, taking a hit on margins. Mr Shibulal has said the company also plans 6,000-9,000 promotions in the current quarter.
- Brokerage upgrades: In February, global investment bank JPMorgan raised its target price on Infosys to Rs 3,200 saying it may have turned the corner. Many other brokerages have upgraded Infosys over the last month.