INFOSYS (NYSE: INFY) – ON GROWTH TRACK

ON GROWTH TRACK

Introduction

Infosys Technology, a USD7.6 bn company, is the second-largest IT services company in India providing consulting and Information Technology services to clients globally. It is among the fastest growing IT services company in the world and a leader in the offshore services space with a pioneer in Global delivery model.

 Case For investment

Infosys reported robust Q2FY14 revenue growth of 3.8% (OoQ) in USD ($)terms led by 4% offshore volume growth, belying Street expectation. The outperformance was led by volume surge. We feel that ,improve deal pipeline along with revised focus on high end revenue model will help the company to achieve higher growth in days to come .         (upper revision of earning guidance is possible)

  • Deal pipeline has improved –  The pipeline is steady and constant  improvement over the last 4-5 quarters which was attributed by better macro-economic environment in US. We see the deal wins in CY13 as a success of Infosys’ new tactical approach and expect the momentum to get better in CY14.
  • Consistent Onsite Business Growth Is Encouraging –  We see the effort of its offshore drive to start bearing fruits and solve the two pronged problem: 1) Lower dependence on low‐margin onsite business 2) Lower dependence on Visa (Immigration Bill).
  • Top end FY14 guidance maintained: INFO maintained the top end of FY14 guidance at 10% US$ revenue growth in FY14, against expectations of a slight raise.
  • There is a change in revenue mix (more focus on higher yield segment) – We saw higher aggression on IMS space. Along with that we felt that it is trying to  rationalise costs, particularly the onsite component, is also heartening impact on the bottom line in times to come

 Sectoral Outlook  

  • Visibility of Earning – We think It company is certainly going to benefit due to  improved US economy / markets. Apart from US market, Europe too slowly contributing.  Given improving macro trends in the US and currency benefits Indian IT company is climbing high in last 1 year. There is a definite confidence in US economy recovery & IT spending by the US Government.
  • We felt that the outsourcing activity from Europe due to mounting cost pressures is going to add traction to this. Though the process is slow but certainly, there is much scope from this geographical area. Europe region is a medium term opportunity for most of the IT company.
  • We think that overall pricing is going to increase. We expect meaningful pickup in demand. It is certainly going to help both in terms of pricing as well as in order book.

Key takeaways

  • Valuation in overall Information Technology sector is at reasonable Level. (refer Annexure – 2).
  • Earning guidelines are higher than street estimate.
  • Q1FY14 indicating improved sales effort and recovery in the US market which bolsters our confidence
  • We think Immigration (Specially US) is the biggest risk to investment.

Concern

  • Immigration concerns or Visa Issue – One of the most important medium term challenge for any IT services company. Though, in short term, there is no issue as such, however, in medium term any change in US govt policy can significantly open up downside risk. The possible repercussions of the US Immigration bill remain a significant overhang on the sector. Secondly, there are similar issues are cropping up in other markets, as well.
  • Pricing Pressure Foreseen in near Term to put pressure in the bottom line. Margin pressure is also likely to continue for a while since Infosys has become aggressive in pricing front.
  • Europe remains a medium-term opportunity.
  • Apart from that a prolonged slowdown in a Global economy, pressure on billing rates due to change in outsourcing policy are the other general structural risk to Infosys.

 

Conclusion

 

Considering various risk and opportunity, we think that Infosys is a “buy”.  We think that due to increased earning visibility primarily due to US economy improvement along with rationalization of cost, focus on high yield business and ability to move up in the value chain will certainly increase the bottom-line in next 2-3 quarters.  We certainly think that it will be able to achieve more than 11% earnings growth.

At Present price, it is quoting 12 month forward earning multiple (P/E) of 19 X. We think that it will continue get the higher premium to its peers. We feel that there is a upside potential of around 8-10% from present level.

 

Appendix – 1 – Financial & Key Ratio

 

Infosys   – Key Highlights

Parameter Analysis
Market Capitalisation Large Cap
Forex Rate Sensitivity High
Liquidity High
Economic Theme Global Cyclical
Majority Shareholders Institution
Interest Rate Sensitivity Insensitive
Promoter Shareholding Pledged Insignificant

Key   Highlights

Valuation Measures
Market Cap (intraday)

32.34B

Enterprise Value (Jan 2, 2014)

28.21B

Trailing P/E (ttm, intraday):

19.26

Forward P/E (fye Mar 31, 2015)1:

N/A

PEG Ratio (5 yr expected)1:

N/A

Price/Sales (ttm):

4.09

Price/Book (mrq):

4.68

Enterprise Value/Revenue (ttm)3:

3.57

Enterprise Value/EBITDA (ttm)6:

13.43

Source – Yahoo Finance

Key   Ratio

VALUATION

GROWTH   POSITION

Infosys TCS Wipro Infosys TCS Wipro
PE (x)

20.86

26.98

19.47

3 Yr CAGR Sales (%)

21.06

28.01

11.21

Price to Book Value (x)

5.24

10.94

5.13

3 Yr CAGR Profit (%)

14.89

26.38

9.05

EV to Sales (x)

4.4

6.6

3.54

1 Yr Sales Growth %

19.62

28.83

0.65

EV to EBITDA (x)

12.76

21.65

14.56

1 Yr EBITDA Growth (%)

10.07

29.3

9.56

Dividend Yield (%)

1.21

1.02

1.34

1 Yr Net Profit Growth (%)

13.17

33.63

6.85

MANAGEMENT   EFFECTIVENESS

SOLVENCY   & MARGINS

Infosys TCS Wipro Infosys TCS Wipro
Return on Capital Employed (%)

36.78

51.04

25.23

Debt to Equity Ratio (x)

0

0.01

0.19

Return on Equity (%)

27.2

40.58

22.99

Interest Coverage(x)

2560.8

374.06

28.19

Asset Turnover Ratio (x)

1.16

1.77

1.16

Current Ratio (x)

4.15

2.36

1.52

Inventory Turnover Ratio(x)

0

3236.91

53.76

EBITDA Margin (%)

34.45

30.51

24.3

Debtor Turnover Ratio (x)

6.22

4.92

4.77

Net Profit Margin (%)

23.37

22.09

16.43

SHAREHOLDING   PATTERN

MARKET   PERFORMANCE

Infosys TCS Wipro Infosys TCS Wipro
Promoter Shareholding (%)

15.94

73.96

73.51

1 Wk Price performance (%)

-0.57

2.02

2.3

FII Shareholding (%)

39.93

16.09

8.82

1 M Price performance (%)

3.37

7.44

17.37

DII Shareholding (%)

16.16

5.58

4.67

6 M Price performance (%)

41.63

44.38

57.39

Public Shareholding (%)

10.51

3.91

5.31

1 Yr Price performance (%)

50.17

70.46

39.28

Promoter Shg. Pledged (%)

0

2.43

0

3 Yr Price performance (%)

0.62

84.86

12.75

 

 

Appendix – 2 – Historical P/E Ratio

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