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Share prices of Infosys Ltd rose nearly 3% on Monday after the company approved a ₹8,260-crore share buyback and also raised its revenue growth forecast.
The stock gained 2.52% to end at ₹700.90 a piece on the BSE.
Intraday, it jumped 3.70% to ₹709. On NSE, shares of the company went up by 2.60% to close at ₹701.30.
This implies growth momentum should continue into the fourth quarter, and return to double-digit growth is certainly something that will excite investors. The company's Growth is certainly back to decent levels.
Apart from the fact that the shares came off a low base, there have been signs of improvement in growth rates under the new CEO, Salil Parekh. In that backdrop, Infosys Q3 results come as a big reinforcement of that belief.
While the Infosys Q3 results were declared after Indian markets closed on Friday, the company’s American depository receipts rose more than 5% on the New York Stock Exchange.
Traditionally, the second half of the fiscal year is relatively softer for software companies due to fewer working days on account of Christmas and New Year holidays.
So for Infosys to raise its forecast based on its second-half performance is quite unusual. The firm raised its growth forecast to 8.5-9% from 6-8% earlier.
Deal wins have been strong, too. Infosys won 14 large deals amounting to about $1.5 billion last quarter.
Cumulatively deal wins so far in FY19 stand at $4.7 billion, more than double the orders Infosys booked in the year-ago period.
But the optimism is yet to reflect in its profitability. Operating margin narrowed 1.1 percentage points sequentially and 1.7 percentage points from a year ago.
While there were some one-offs, even after adjusting for them, margins were lower than Street estimates. But investors seem to be in the mood to ignore margin-related concerns, given the strong pickup in growth.
Infosys is investing in building sales and digital capabilities, besides giving related compensation hikes to tame attrition.
In addition, transition costs in large deals are leading to softness in margins. The investments are expected to continue, implying the trend of soft margins should continue in the near term.
While growth is back, it has to be seen if momentum will sustain on a higher base. Growth in the last two quarters came off a relatively low base.
That said, Infosys trades at a sizeable valuation discount vis-à-vis bigger rival Tata Consultancy Services Ltd, and the large share buyback should also help support the former’s stock.
The buyback price is at a 16% premium to the last closing price of the stock. Importantly, it will be implemented through the open market route, which means the company will be regularly buying shares from the market and this will support the Infosys stock.
Sanjeev Hota, assistant vice-president (research) at Sharekhan by BNP Paribas said, Infosys’s performance surprised positively with strong top-line growth for the quarter, though margin performance missed the mark.
“Increase in revenue guidance and better exit rate for FY19 provides comfort on double-digit growth in FY20. Buyback quantum seems to be below than expectation, however, will support the stock performance in the medium term,” he added.