Infosys Limited (“INFY” or the “Company“) is a global leader in consulting, technology, outsourcing and services, with a strong workforce of more than 194,000 employees.

Click here for previous year’s Financial Statements of INFY

INFY provides business IT services across:

  • Application Management
  • Business Applications
  • Business Process Outsourcing
  • Cloud
  • Digital
  • Engineering
  • Infrastructure management
  • Management Consulting
  • Enterprise Mobility

INFY has a diversified geographical presence with 100 development centers spread across India, APAC, the Americas & Europe, and servicing clients in more than 50 countries.

Geographical Breakup – 61.6% of the overall revenue of the Company comes from U.S., followed by 24% from Europe, 2.5% from India, 11.9% from Rest of the World.

“Within the blue chip IT packs, 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 more exposure to telecom or other beaten down sectors like metals. INFY’s BFSI domain constitutes 33.10% of its total revenue.”

Strong Balance Sheet with Healthy Return Ratios

INFY has a strong balance sheet, strong earnings and healthy cash & cash equivalent of Rs. 226,250 million (as on 31st March 2017). The Company operates with ZERO debt on its book. INFY has shown consistent growth over the last ten years (i.e. 2007-08 to 2016-17). Its net revenue from operations over this period grew at an impressive CAGR of 17.96 %.

For FY 2017, income from operations increased by 10 % to Rs. 684,840 million from Rs. 624,410 million and PAT increased by 6 % to Rs. 143,530 million from Rs. 134,910 million. INFY has reserves in excess of Rs. 650,560 million.

With healthy operating cash flows and zero debt on its books, we expect the return ratios to stay healthy going forward.

INFY

10 YEAR AVERAGE P/E = 19.34

2008

2009

2010

2011

2012

Price

357.54

331.03

653.78

809.19

716.24

EPS

20.3

26.1

27.4

29.9

36.4

P/E

17.60

12.68

23.83

27.11

19.69

2013

2014

2015

2016

2017

Price

722.48

814.44

1108.3

1217.95

1020.8

EPS

41.2

46.6

53.94

59.03

62.77

P/E

17.53

17.48

20.55

20.63

16.26

Current P/E

Price

927

EPS TTM

62.77

P/E

14.77

Based on the above Price Earning (PE) multiple averages for the past 10 years, INFY is available at cheap valuation and is currently trading at ~ 24% 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 INFY’s fair PE multiple is seen at 19.34, what should be its price right now? This is an easy calculation to do:

Price / EPS = 19.34

Price = (19.34 * EPS) = (19.34 * 62.77) [this is INFY’s EPS for FY 2017]

Price = Rs. 1,213.97

Based on 10 year average PE ratio, INFY’s fair price is Rs. 1,296.01. Of course many will argue that attributing past valuations may not be right since the industry will not expand at the same rate in future.

High Dividend Yield Stock

INFY has consistently been among the top dividend paying companies. The Company has been consistently paying dividends for more than 10 years.

The current dividend yield for INFY is 2.63% (based on closing price of 27 April 2017).

New Capital Allocation Policy

INFY has revised the capital allocation policy after taking into consideration the strategic and operational cash requirements in the medium term. The Company plans to pay Rs.130,000 million via dividend/share buyback to shareholders in FY 2018.

Additionally, effective from FY 2018, INFY revised its payout policy to 70% of free cash flow from ~50% of PAT earlier. The revised capital allocation policy seems to be a positive step in shareholder value creation.

Growing Client Relationships and Increasing Client Base

INFY’s 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. INFY has added 321 new clients in FY 2017, taking the total client base to 1,162.

INFY 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 INFY to enable its clients in transforming their businesses with innovative strategies and solutions.

Client metrics

Top 5 client’s contribution to revenue

12.6%

Top 10 client’s contribution to revenue

21.0%

Number of active clients

1,162

New clients added in the period (FY 2017)

321

Repeat business %

97.3%

Increased Focus on Digital Space

INFY 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, INFY 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, INFY 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 INFY is building strong capabilities in digital technology space across industries, we believe this move would augur well for the Company.

Conservative Management Guidance and H1-B Visa Concerns for FY 2018

Adverse macro-economic environment coupled with cut back in IT spends by vendors and concerns over H1-B visa regime are hindering the growth prospects of the software services sector. The management has given a conservative revenue guidance of 6.5-8.5% in constant currency terms for FY 2018.

Past Management Revenue Guidance VS Actual Growth

INFY

FY 2013

FY 2014

FY 2015

FY 2016

FY 2017

Revenue Guidance

6.5%

11.5-12%

7-9%

10-12%

8.4-8.8%

Actual Revenue Growth

5.8%

11.5%

7.1%

13.3%

8.3%

One Year Stock Performance

1.27%

10.39%

34.71%

11.02%

-15.35%

Lower IT Sector Growth Rate

Everything bad that could happen to IT stocks happened in FY 2017. Here’s a post explaining all negative events and its impact on IT stocks. Keeping all this in mind, for FY 2018, Nasscom has deferred to give its estimated growth projection but many brokerage houses are expecting the growth projection in the range of 6-8% lower than previous year’s projection (8-10%) due to global macro uncertainty, cross-currency fluctuations, structural shift in the industry and political uncertainties.

VIEW

I believe that most negative news has been factored in and that the stock has corrected much more than it should have. Any positive triggers could result in a sharp recovery in the stock price. Given its strong fundamentals and healthy balance sheet, INFY will continue to pay out higher dividends and makes for a compelling buy at current price.

Disclosure: I am/we are long INFY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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