In­fosys : Still A Good Bet De­spite Tough Times

Dalal Street Investment Journal - - CONTENTS -

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.

COM­PANY OVERVIEW

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

5. Skava

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.

IN­DUS­TRY OVERVIEW

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 FI­NAN­CIALS:

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.

PEER COM­PAR­I­SON

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.

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