Infosys : Still A Good Bet Despite Tough Times
Infosys is a name which needs no introduction. Started in 1981 by seven engineers with a small investment of US$250, the company has recorded revenues of US$ 10.2 billion in FY17. Here, at DSIJ, we present an exclusive analysis of Infosys Ltd which has been creating wealth for its investors for more than two decades.
Infosys is an Indian multinational corporation providing business consulting, information technology and outsourcing services. Infosys helps its clients to renew and simplify their existing technology landscape and helps them design new technology based solutions to their business problems.
The company's key products are:
1. NIA - Next Generation Integrated AI Platform (formerly known as Mana)
2. Infosys Information Platform
(IIP)- Analytics platform
3. Finacle: A universal banking solution with various modules for retail and corporate banking.
4. Panaya: Cloud suite
6. Edge Verve systems
The company's primary geographic markets are North America, Europe, India and rest of the world, which generated 61.9 per cent, 22.5 per cent, 3.2 per cent and 12.4 per cent, respectively, of their consolidated revenues in FY17.
The company derived major share of 27.1 per cent of its revenue from BFSI vertical in FY17. Energy & utilities, communication and services (ECS) generated 22.5 per cent revenues, followed by retail consumer packed-goods and logistic (RCL) which accounted for 16.4 per cent in FY17.
The company is listed on both BSE and NSE. The company’s American Depositary Shares (ADSS) are also listed on the New York Stock Exchange (NYSE), Euronext London and Euronext Paris.
Infosys operates through 30 offices across India, the US, China, Australia, the UK, Canada and Japan. It has its headquarters in Bengaluru and has a workforce of 198,000 employees.
India’s IT industry contributed around 7.7 per cent to the country’s GDP in 2016. The information technology and business process management (IT-BPM) industry's revenue was about US $ 130 billion in FY 2015-16. Of the total revenue, about 80 per cent was contributed by 200 large and medium companies. Indian IT-BPM industry comprises of more than 15,000 firms, of which about 1000 are large firms.
The IT-BPM sector in India expanded at CAGR of 13.7 per cent over 2010–16, which is 3–4 times higher than the global IT-BPM growth.
The IT industry in India employs nearly 3.9 million people. The sector ranks fourth in India’s total FDI share. It accounts for about 37 per cent of total private equity and venture investments in the country. According to data released by the Department of Industrial Policy and Promotion (DIPP), between April 2000 and March 2017, the computer software and hardware sector in India attracted cumulative FDI inflows worth US$ 24.67 billion.
Total exports from the IT-BPM sector were US$ 108 billion during FY16; exports rose at a CAGR of 61.68 per cent during FY09–16. India’s IT industry amounts to 7 per cent of the global market, largely due to exports.
SLOW IT GROWTH ENVISAGED
The software industry is already bracing for slow growth. The Indian IT services industry faces its toughest external environment in a decade. Many low-end jobs are getting automated due to big technology transformation. The overall external situation has worsened on account of the US President Donald Trump's protectionist policies, especially with regards to work visas and preference in jobs for Americans.
The slowdown is likely to be sharper in the coming year, especially for companies that have about half their employees in the United States working on H-1B visas. Indian companies will have to hire more locally and will have to pay higher salaries onsite. Hence, in the next one-and-half year, earnings growth will be tough for the sector
ONGOING INTERNAL CONFLICTS
Over the past one-and-half year, there have been differences between the Infosys board and founders on matters of
governance. Infosys carried out internal investigations after two whistleblower complaints to market regulator SEBI alleging improprieties in Infosys’ $200 million acquisition of Panaya. Infosys founder NR Narayan Murthy wanted the entire report and its scope made public to enhance transparency and accountability. But the company only published the conclusion of the reports, stating that no evidence was found supporting the allegations. Other points of differences were former CEO Vishal Sikka’s salary and severance payout made to former CFO Rajiv Bansal. The escalating issues finally led to the resignation of CEO & MD Vishal Sikka.
SHARE BUYBACK PLAN
In order to pacify its shareholders after the resignation of Vishal Sikka, Infosys asserted that it will repurchase as many as 113 million shares at ₹1,150 each. The repurchase price represents a 25 per cent premium to its closing price at the time of announcement. This massive ₹13,000 crore buyback, amounting to nearly 5 per cent of the company’s share capital, is aimed at increasing the returns for the shareholders. As per market regulator Security and Exchange Board of India’s rules, 15 per cent of buyback is reserved for retail investors (having shareholding up to ₹2 lakh). This implies that around 1.70 crore shares in the buyback will be reserved for retail investors. With total retail holding of 2.87 crore shares, even if all of the retail shareholders tender their shares, the acceptance ratio will be 59 per cent. Although many small Infosys shareholders may fail to tender their shares in the buyback for various technical reasons, the buyback offers a decent arbitrage opportunity for others.
Infosys started well in FY18, retaining its full year constant currency revenue growth guidance, thus beating analysts’ expectations.
The company's revenue for the quarter ended on June 30, 2017 dropped by 0.2 per cent to ₹17,078 crore compared to ₹17,120 crore in the corresponding quarter of last year. Its consolidated profit during the quarter fell 3.3 per cent sequentially to ₹3,483 crore.
Its earnings before interest and tax (EBIT) declined 2.4 per cent to ₹4,111 crore and margin contracted by 50 basis points to 24.1 per cent compared with previous quarter. All these numbers exceeded analysts' expectations.
The gross client addition for the quarter stood at 59, compared with 71 in the March quarter. The company added 6 clients in $25 million category. Infosys has estimated that it would grow at 6.5-8.5 per cent in the current fiscal year, after providing for fluctuations in exchange rates.
On the valuation front, Infosys is trading at PE ratio of 14.27x as compared to industry PE of 18.07x. The company’s ROE and ROCE stood at 22.03 per cent and 20.29 per cent in FY17, respectively.
Infosys has given 2.88 per cent dividend yield to its shareholders in FY17. The company has book value of ₹298.30.
TCS and Wipro are the major peers of the company. The company stands apart from others maintaining its higher dividend yield. Its dividend yield is 2.88 per cent as against 1.89 and 0.34 per cent of TCS and Wipro, respectively.
Infosys PE stands stable at 14.27 as compared to 18.41 of TCS and 16.62 of Wipro. Its P/B ratio stands at 3.0 while Wipro has a comparatively lower P/B value of 2.64.
A positive first quarter and the recent appointment of the co-founder and celebrated technocrat Nandan Nilekani is expected to revive some confidence in Infosys. We recommend HOLD on the stock for our reader-investors.