Date: 13 February 2017
Price: Rs. 1,000.05
Infosys Limited (“Infosys” or the “Company”) is a global leader in consulting, technology, outsourcing and services, with a strong workforce of more than 194,000 employees. Infosys provides business IT services across:
- Application Management
- Business Applications
- Business Process Outsourcing
- Infrastructure management
- Management Consulting
- Enterprise Mobility
The Company caters to various industry segments that primarily include Financial Services and Insurance (FSI), Manufacturing (MFG), Energy & Utilities, Communication & Services (ECS), Retail, Consumer packaged goods & Logistics (RCL) and Life Sciences & Healthcare (LSH). Infosys has a diversified geographical presence with 100 development centers spread across India, APAC, the Americas & Europe, and servicing clients in more than 50 countries, thus de-risking its geographic presence.
Within the blue chip IT pack, we would focus more on companies which get a majority of their revenue from BFSI (Banking & Financial Services Industry) sectors which is likely to do well in the coming years and avoid companies which have maximum exposure to telecom or other beaten down sectors like metals. Infosys’s BFSI domain constitutes 33.1% of its total revenue.
Strong Balance Sheet with Healthy Return Ratios
Infosys has a strong balance sheet, strong earnings and healthy cash & cash equivalent of Rs. 32,697 Cr. (as on 31st March 2016). The Company operates with ZERO debt on its book. Infosys has shown consistent growth over the last ten years (i.e. 2006-07 to 2015-16). Its net revenue from operations over this period grew at an impressive CAGR of 17.96 %.
For 6 months period ended FY 2017, income from operations increased by 14 % to Rs. 34,091 Cr. from Rs. 29,989 Cr. and PAT increased by 10 % to Rs. 7,041 Cr. from Rs. 6,427 Cr. Infosys has reserves in excess of Rs. 63,681 Cr. With healthy operating cash flows and zero debt on its books, we expect the return ratios to stay healthy going forward.
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Based on the above Price Earning (PE) multiple averages for the past 10 years, Infosys appear to be available at cheap valuation and is currently trading at ~ 23% discount. The other way to look at this would be to calculate the fair price of the stock based on its historic PE multiple.
In other words if Infosys’ fair PE multiple is seen at 20.67, what should be its price right now? This is an easy calculation to do:
Price / EPS = 20.67
Price = (20.67 * EPS) = (20.67 * 62.70) [this is Infosys’ EPS for the trailing 4 quarters]
Price = Rs. 1,296.01
Based on 10 year average PE ratio, Infosys’ fair price is Rs. 1,296.01 while it is trading at Rs. 1003 or at a 20% discount
Increased Focus on Digital Space
Infosys has made strong developments in Social, Mobility, Analytics and Cloud (SMAC) and digital transformation through inorganic route. According to NASSCOM report 2016, SMAC revenue will account for ~20% of the total revenue of Indian IT companies in 2020, from current levels of less than 5%.
In FY 2016, Infosys acquired Kallidus Inc. Currently; it is doing business as ‘Skava’ which provides digital experience solutions, including mobile commerce and in store shopping experience to large retail clients. In FY 2015, Infosys acquired Panaya Inc, which enabled the Company to provide higher-margin automation solutions to its clients.
On the domestic market front, India’s government focus on digital India initiative throws a rich opportunity for the IT players. As Infosys is building strong capabilities in digital technology space across industries, we believe this move would augur well for the Company.
Growing Client Relationships and Increasing Client Base
Infosys’ client centric approach and high level of execution excellence continues to provide a high level of client satisfaction. This is clearly visible from its repeat business which is generating ~97% of its revenue. Infosys have added 173 new clients in H1 FY 2017, taking the total client base to 1,136.
Infosys continues to expand existing client relationships by providing them with a broad set of end-to-end service offerings and increasing the size, nature and number of projects that can be done with them. Further, the Company’s specific industry, domain, process and technology expertise allow Infosys to enable its clients in transforming their businesses with innovative strategies and solutions.