Infosys Limited - Are we getting a discount or no?


(vishwa.bhat19) #1

Hi All. This is my 3rd or 4th post here. I do not see any discussions related to Infosys which are happening currently. I am seeing the string “Infosys” only in discussions of other companies in the search results. If there is already a current thread running on Infosys and I have missed it please forgive my ignorance and seniors kindly delete this thread and guide me towards the right one.
CMP. Rs.990 per share
Infosys - I will skip the introduction since it is one of the greatest IT companies in India and by revenue size it is the second largest IT company in India after TCS. Once a fast growing company in terms of revenue and profits, it has now slowed down.

I just took the price of Infosys share on 24th April every year and calculated the PE ratio for the last 11 years.

2006 - 37.57
2007 - 30.41
2008 - 20.489
2009 - 13.789
2010 - 25.1
2011 - 24.52
2012 - 15.93
2013 - 13.78
2014 - 17.01
2015 - 19.9
2016 - 20.56

The PE ratio went really low in 2009, 2012 and 2013.

What happened in 2009?

There was a recession in US. This was due to banks lending money to sub prime borrowers, consequently followed by a federal rate increase and property rate decline. Hence borrowers defaulted. Housing bubble burst.

Due to this Infosys was adversly affected and hence this is the reason for the low PE.

What happened in 2012 and 2013?

**Shibulal was the CEO.
I have this opinion that Shibulal was the worst CEOs of Infosys. This is not based so much on facts as it is on just his face value and listening to him etc. Sorry! Lets get back to facts.

He started restructuring Infosys which lead to slow down in project implementation timelines etc. At a time 2012-2013 when there was nothing much wrong in the IT industry(If there was please correct me) the growth declined and Shibulal blamed the same on slowdown in Finance Banking and Insurance sectors saying these clients were not taking any decisions. Also this was done in the last quarter of 2012.

I am not very sure on if the extremely poor performance of Infosys was due to industry conditions in 2012 and 2013.

Comments are invited on this.

The Average PE ratio over the last 11 years was around 21. Right now with a market price of Rs. 990, the PE ratio is around 16.78; way below the average of the last 11 years.
The Price to Book Value is around 3.9 and the Dividend yield is around 2.45%.

Looking at the Return on Capital Employed over the last 10 years, just highlighting the performance of various CEOs.

2007 - 33.84
2008 - 33.13
2009 - 32.60
2010 - 26.5 ->>>>CEO was Gopalkrishna
2011 - 26.29 ->>>>Shibulal Starts
2012 - 28.46
2013 - 25.15
2014 - 24.01 ->>>>Shibulal Ends
2015 - 25.29 ->>>Vishal Sikka
2016 - 27.58 ->>>Vishal Sikka

The profitability margins took a huge hit under Shibulal and never recovered under him. Under Dr.Sikka I can see them improving, but its been just 2 years now. So pretty tough to comment

Current Scenario:
The IT industry is now in truth facing slowdowns in the Banking sector. Clients are reluctant to spend for enhancements and are just spending on “Run The Business” kind of stuff.
Still Infosys seems to be adding 2-3 clients every quarter.

Royal Bank of Scotland effect - 300 millions US dollars revenue lost
300 millions dollars is Rs.2001.75 crore.
Total Revenue of Infosys for the year 2016=62441 crore rupees.
Hence RBS just forms 3.2 % of Infosys revenue.
Taking a net profit margin of around 29 %, we can say that the effect on this on the bottom line of Infosys would be just 1.3%. I dont know if the word “just” is “justified” here. It is open to discussion :stuck_out_tongue:
**The write off of the 300 million dollars would probably be spread among this year and the next.

In tough times like these Infosys is managing to improve the bottom line every quarter and also comapred to the same quarter in the previous years.
Ending my discussion, the following are the questions I have.
Is a PE of 16.78 a bargain compared to the average of 21 over the last 11 years?
Or are those times over and Infosys is doomed to a PE in the range for 14-17 for ever?

Disc: Invested since 2014. Forms 10% of my portfolio


(Abhishek Basumallick) #2

No one can say what will happen “forever”, but PE is a function of many factors - growth potential, discount rate, stability of earnings, management pedigree etc.

Currently, IT services companies are undergoing major structural changes with lower spend from clients, lower contract sizes, move to niche players for small technical projects, move of infra to cloud, digital plays, focus on cognitive systems etc.

Infosys, or any other large Indian IT services company, is not a front runner in any of these areas. Their bread and butter application management services business is stagnant or in a decline.

Infosys may turn around. Client spends may pick up. But it will take time. And the age of headcount led growth is over, so Infy & others need to change their business model.

Right now the entire industry is in a transition. And it’s difficult to predict reliably how things will pan out.

In terms of the management, in my personal opinion, the only really great leader infy ever had was Nandan Nilekani. How Sikka does remains to be seen. Its too early to comment.


(Shan) #3

Agree with abhishek but also the fact that it’s an assett light high roe business is a fact that can’t be ignored. It’s a fountain of free cash flow, imo the only question is how much free cash flow. That means margin may shrink but I don’t see infy making losses anytime soon. Infy has weathered a few other slowdowns in the past so one would expect management and employees to be capable of handling slowdowns.

Disc: have only a minor position, but I’m long a few other midcap IT cos as contra bets


(v s bosebabu) #4

For short term uptrend dollar should be 70+.For longterm its a good stock to enter.We can get more returns than a fixed deposit rate.

Disc:Invested for longterm.


(hrfacebuk) #5

Agree with @basumallick’s views. Have shared views on this subject earlier as well in the Persistent thread. To add to what Abhishek has said-

Indian IT firms are going through transition phase and the client spending is low because the client’s themselves are going through a major transtioning phase due to digital, cloud, automation and whole lot of other fintech related stuff and disruptions. Clients are in a wait and watch mode before committing further spends and this is impacting not only IT but also capital investments in various sectors.

Business models of clients themselves are being challenged and client’s wait and watch mode in various industries is also evident from things like say capital investments are down but relatively speaking R&D spends are not. Once these R&D spends start bearing results in future then who would benefit is also another question?

Clients are in wait and watch mode also because the new age technologies are also changing the way in which products and services are being acquired and consumed.

Exact impact of newer technologies and fintech etc. on Indian IT is a bit difficult to gauge, but from where I see it things don’t look rosy. For e.g. Biggest components of Fintech globally are payments, loans and P2P and in India in similar segment we have somebody like PayTM. The number of people required to maintain these modern day fintech disruptions is very less as compared to number of people that were required to maintain whole lot of legacy systems of clients.

Standardisation is another enemy for a business model like that of Indian IT. Technologies like Blockchain can standardize the whole landscape for all the stakeholders operating in the areas in which such technologies would be implemented and if legacy backoffice & settlement systems start getting replaced and things start getting so standardized then you wouldn’t require anywhere close to the number of people that are required today to maintain such new fintech based systems.

Another thing is a lot of industry players themselves globally are surprised by the pace of adoption of these new age technologies. For e.g. Industry analysts believe that blockchain led solutions in financial services will see mature implementations in another 2-3 years, down from 5-10 years just one year ago. Within financial services too segments Capital Markets may see slower developments as infrastructure that is likely to be disrupted is very complex and too some extent resistant to change. But as solutions develop and mature the adoption at later stages would be very swift.

All such high end new tech work and fintech is being carried out from locations like London, NY, Singapore, etc., and not in India. Cities like London have a thriving fintech start-up ecosystem and a lot of support. For e.g. regulator support as regulators are not intervening at present as they want fintech to evolve and grow and only once it attains a critical mass that they would intervene. Infact they are playing a constructive role at present by giving inputs. For e.g. Corporate Accelerators (CAs) - CAs are like traditional start-ups that are financed by VCs, but their objectives are mostly defined by sponsoring organisations. And who are these Sponsoring Organisations (SOs)??? These SOs are none other then the end clients for Indian IT firms. Clients like Credit-Suisse, Barclays, Lloyds, JPMC of the worlds. SOs go to the extent of providing mentorship, finance, office space and SME support to these start-ups. Corporates are realising that SAs are strategic decisions that allow these large firms to stay relevant in this competitive and rapidly changing modern day economy. I don’t need to state the benefits of such a strategy for these corporations as most of we would be able to deduce that. Still to make an understanding clear would be an analogy with Gillette acquiring Dollar Shave Club. This is a global phenomenon in most industries now a days due to business models of established corporations being challenged by new age start-ups. It is a bit different in this case though as these corporations are incubating their service providers/tech providers itself. Another e.g. of benefit would be - Post 2008 financial crisis global IBs have had to provide for a lot of regulatory capital in already challenging environment. Technologies like Blockchain if can achieve instantaneous settlement can release a lot of regulatory capital kept aside as counterparty risk would get reduced substantially. So another incentive for these corporations to sponsor and support these start-ups.

Even if companies like Infosys are able to make some headway in newer technologies/fintech/cloud etc., still the question will be that would it move the needle for them? I belong to the camp which would say looks difficult and even if it does then it would take a very very long time.

It has never been a better time for these big Indian IT companies to utilise their Cash; If they can do so judiciously by making sensible acquisitions which would fast forward the journey for them to an extent and would keep them more relevant.

I am a well wisher for Indian IT industry as it is good for India and sincerely hope that things turn out to be for the better.

Note: Although a bit negative but these are just my views in general. I share the above on the basis of my experience and what I see around me. I also had an exposure to London Fintech week in July this year which is Europe’s largest event showcasing start-ups and capabilities of existing firms. I am not a technology guy but have an experience working with some of the global IBs in various consulting roles since last 7 years. Also probable that I am biased due to my experiences.

Discl: Not invested in Infosys.


#6

Well explained by @hrfacebuk

IT sector is going through a bad time due to Fintech evolution. All the big players are suffering a lot.

In my opinion, Wipro may lead the IT market in coming future. The whole street is bearish on this stock now. It had also reported disappointing numbers Q by Q.

But the strategic move taken by Wipro is quite ahead of any other companies. They had acquired 4 companies (including Appirio) in last 18 months.

Long term guidance of the company is maintained excellent by management - http://www.moneycontrol.com/news/results-boardroom/strategic-bets-needed-to-meet-3615-bn-sales-aim-by-2020-wipro_7668101.html

And Infosys had the highest amount of cash reserve in its books but Wipro had the highest percentage of market cap to net cash among all the It companies which stands at 16% which makes it a value bet - http://www.deccanchronicle.com/business/companies/260916/it-giants-sit-on-huge-cash-pile.html

Invested in Wipro and Infosys - not Invested. My views may be biased.


(vishwa.bhat19) #7

Wow!! I posed yesterday night and I had a look today morning and was so happy to see that I had started off a discussion. This Forum is seriously amazing!! Awesome comments by all of you guys. Thank you guys :slight_smile:

Let me try to take this further with some more digging when I get some time.


(ANANT JAIN) #8

I think what is happening in IT sector is a classic case of ‘Value Migration’. Value is shifting to cloud service providers (Amazon (AWS), Microsoft (Azure), IBM, Google) and away from the IT Vendors who until now relied heavily on body shopping. Add to this the emerging trends in AI and Automation a lot of manual work will go away (KPO, BPO etc.).

If I look at major IT service providers I do not see any differentiation and zero innovation. Some of the fundamental assumptions of the clients around data security, application deployment and upgrades, server downtimes, server management and configuration where most IT companies operated, are today being better served by cloud and in a far more cost effective manner. Some of the most data critical industries in BFSI segment like insurance are already going cloud (Majesco’s cloud solution) and this trend will continue and accelerate. As more and more solutions go on cloud the service approach gives way to a configurable product which is more standardized reducing the requirement of a service provider.

A clear example of this Value Migration can be seen in Microsoft’s market cap. The company’s product division is struggling and the company’s mobile strategy failed, despite this the company’s market cap has more than doubled in last 5 years and it trades at a PE multiple of around 30.

In my opinion the Value Migration phase will accelerate and we will see sales degrowth and layoffs from hereon and it will take some time to stabilize. I am not sure if any of these companies have prepared themselves for this tough landing and also they do not have the technical depth to act fast. In my opinion most IT stocks will continue to have high return ratios due to employee retrenchment but with sales degrowth. From a stock return perspective they will continue to have –ve returns initially and will become value traps when market stabilizes.

Discl: No holding in IT. I Have had a –ve opinion on the sector since last few years. The view for product companies is not the same. I hope I am proven wrong .


(hrfacebuk) #9

Again agree with every word from @Anant

Some nos. (from an article I was reading) on cloud to put things into perspective from value migration pov.
Morgan Stanley, for instance, predicted that 30% of Microsoft’s revenue will come from the cloud in 2018. In 2015, Amazon Web Services generated $7.88 billion in cloud revenue in the fourth quarter alone, up 69% over the previous year. This comes as worldwide spending on public cloud services is expected to grow at an annual rate of 19.4%, reaching $141 billion in 2019.

Infact there are already some layoffs taking place. And infact at a macro level it is not only IT but manufacturing sectors also stand to be impacted due to automation, robotics,other new technologies, etc., India cannot stay behind and would need to adopt newer technolgies. India would need to strike a balance between such adoption and changing demographics given the rapid pace of urbanisation.


(vishwa.bhat19) #10

Just adding some numbers with respect to the current price of Rs. 921.55

Price to Book Value = 3.7
Price to Earnings = 13.408

This is the lowest PE ever in the last 11 years, beating the ones in 2009 and 2013.

Does this look like a “…value stock in a depressed industry” or “…beaten down to unfair levels…”?

Or is this one of those times where the Market is spot on?


#11

Disc: Invested and down 10% :slight_smile: My views may be biased.

This looks pretty cheap compared to Cognizant which has similar growth profile now. Infy PE is much lower than Cognizant. It is lower than TCS also which is larger and growing slower.


(atulgupta80) #12

it’s worthwhile to look at what is happening with IBM. A matured IT company. Another problem with INFY is owner and operator are quite diffferwnt which is not the case with Wipro.

Disclosure: invested in none


(Rajeev M. Parashar) #13

For the perusal of those who might be interested, I’m posting the links to two fairly detailed bearish reports on Indian IT Services by Phillip Capital.

http://www.phillipcapital.in/Admin/Research/1456700203PC_-IT_Sector_Report-_Dec_2015_20151222145026.pdf
Read this report for:
• How the last decade turned out to be the ‘lost decade’ for Indian IT companies
• How the Indian IT companies are getting sandwiched between large global consultants
and small niche companies
• Our downgrade of the IT sector, based on them failing to capitalize the early stage of
the digital transformation wave

https://www.phillipcapital.in/Admin/Research/1473334446PC_-IT_Sector_Report-_Aug_2016_20160818115747.pdf
Second law of thermodynamics – in play! Entropy of the universe is increasing.

Disclosure: Not invested in Infy or any of the other IT biggies.


(Shan) #14

Thanks for sharing. I don’t think there’s any doubt that IT will face headwinds in the upcoming quarters. The question is whether this is the point of maximum pessimism which can be capitalized on. Is the market so excessively bearish that a contrarian play makes sense. Is there enough blood in the streets to warrant a buy.

Disc: long IT cos and planning to accumulate further over the next year as a contrarian play


(Rajeev M. Parashar) #15

I think the IT biggies will be able to adapt themselves to both the technological & business model disruptions, but they will have to cut off a lot of their flab (employee headcount). I don’t think a lot of their current workforce can be re-skilled quickly enough.


(GSApte) #16

Hi All,

All businesses face headwinds which IT industry is currently facing and going through.
These same IT companies were trading at P/E multiples of 22-25 just one year back i.e. during Jan-May 2015 periods and are now trading at much lower valuations.

Many analysts were coming with BUY reports for Tier 2 companies at those valuations, and see where those stocks are today. At that time, they never understood that such valuations would not sustain for ever even though earnings growth may continue for few quarters. Now, many of those IT stocks are available at P/E of 11 to 15, including large caps and mid caps.

IT industry is undergoing following changes:

  1. Clients are moving from effort based costing model to “output” based costing model. Software is sized using some standards and then based on the size, cost is derived. IFPUG / NESMA Function points is mainly used to derive software size and then costs which was not the case till 2010-11.

  2. Clients are demanding more rapid innovations based on Agile delivery model and most of the Indian IT companies are on par with their foreign counter parts in agile based delivery, so they will sustain their business. There could be some short term pains but long term story is intact.

  3. Clients are reducing their budgets hence demanding IT companies to provide solutions at lesser cost, hence margins are reducing. But this can not happen infinitely and at some point of time, new normal margins will emerge.

  4. Cloud, Analytics, Security, IoT (Internet of Things) and Mobile based solutions will be in demand and those IT companies which are having this expertise will gain from these technical trends.

Having said this, near term headwinds and pain will remain for few quarters and after that, growth may revert back to double digits. It is true that, now earlier earning growth rates would not get repeated easily, so new normal growth rates could be 10-15% in large caps and higher in mid caps, and that also would take few quarters considering pricing pressure and competition.

These are my personal opinions based on vast experience of working in IT industry and I may go wrong.

Disc: Invested in Infosys from lower levels and planning to hold.


(kumarshah) #17

With the uncertainty over US immigration laws and Donald Trump looking to restrict immigration further, what are overall thoughts on Indian IT industry? Bill has been filed to increase H-1 wage to 130,000 and reduce use of L-1 visas.

It looks like the WH doesn’t want to just restrict Muslim immigrants but fundamentally transform how US government admits migrants and issues visas:

Here is Bannon saying how having too many Asian CEOs is bad for America:

Infosys may have been able to weather normal headwinds, but there is also nothing they can realistically do about immigration laws changing.

Disc: Invested recently (thought Clinton would win), unsure whether to hold.


(Sunnytv) #18

The quick answer and is no one knows and if anyone tries to convince you either way is just fooling you.

The long answer is depends on your duration of investment. If it’s for few months - anybody’s guess; even couple of years, it’s any body’s guess but unlikely to be hugely above fd rates or likely to be lesser than that. If it’s for your children education or retirement after twenty or twenty years , there is a high possibility of you having ’ decent return’

Sorry for being deliberately vague, it’s a mature company there no way it’s going to give you multibagger returns over next few years. It will chug along slowly and steadily stop in between for extended periods without notice, and then again start:depends on you when you want to get off it.


(Sunnytv) #19

Will anyone with a long memory be able to kindly comment/ provide more info on - suspicion of internal leaks in Infosys just before results causing shares to spike in late nineties
-NRN delaying disclosure of harassment case against p murthy

  • recently read something on these lines in an article in mint but was quite vague about it
  • interested to know the history of the company and if true sounds like pot calling the kettle black

(Shan) #20

Also I believe there was controversy around NRN dragging in Rohan Murty when he came back in. I don’t think it matters anymore, but just in case you want to dig into the past …

Disc: long infy