Infosys Limited - Are we getting a discount or no?


(Bheeshma Sanghani, PhD) #21

Infosys PE ~ 14.8, TCS PE ~ 17.49. Infy dividend payout ~2.62% & TCS ~1.68%. Infy price to book - 2.94 and TCS - 5.36.

These are exceptional times for Infosys as Mr Murthy has lamblasted the governance standards at infy this has co-incided with flat profits and sales growth. The stock has reacted expectedly and may form a triple bottom . This is a good trading opportunity. The dividend payout also provides a cushion. I looked at all the tech biggies and except infy no stock has formed any double bottoms. In fact some of them remain in a strong uptrend. Also infy employee cost is very high at 55% compared to TCS which is at 39%, wipro at 48% , HCL tech at 49%. There is an opportunity to shave of at least 5% off the employee bill ( its got a overpaid and underworked top layer as mr murthy has pointed out).

I expect a round of layoffs in infy in the coming year adding to the bottom line ( pun intended) with no real impact on the profits.

Infy a low PE, high dividend with reasonable growth prospects stock? I think it deserves a rating of at least ~18. The double bottom ( if it gets formed ) is almost sure to give a nice price pop esp when others in the sector are nowhere close to the price weakness infy is displaying. A trading opportunity to make some quick bucks in the next 2 mths or so.

Disc - i am waiting for the triple bottom to form fully and will park some funds in it for 2 months.


(saikathalder) #22

Thanks bheesma, for the analysis, I agree with you. But don’t you think as an investor, it is more prudent to invest in other IT stocks like hcl tech, or tata elxsi. HCL is more promising to me, as it investing heavily in AI, cloud and SMAC technologies.
I am a newbie here. Please provide your views on this.
DISC: not invested in any of the IT stocks.


(Bheeshma Sanghani, PhD) #23

I would look at infosys purely as a very short term trading opportunity with limited downside. There are other IT businesses - some of them you have mentioned - that are better positioned to invest in technologies of the future but i have no understanding of these technologies. All i know is that a double bottom is about to form and if it does you can expect a nice price pop that you can trade to make some riskless cash.


(Bheeshma Sanghani, PhD) #24

(csteja) #25

Does Infosys plan for any buyback ?


(Srinivasan Sundaram) #26

@bheeshma

Can we take as triple bottom formed?


(Bheeshma Sanghani, PhD) #27

I would wait for the prices to break some minor previous top before i come to that conclusion. As you can see there are no minor previous tops in case of infy. So its risky to just rely on the expected formation of a triple bottom. Sometimes prices do this optical trick. I have learnt the hard way.

I would look for some signs of margin improvement. Esp some steps taken towards rationalising its salary bill. Till then get a packet of popcorn and watch the fun from distance!

Disc - i have parked some funds in infy as mentioned above. I think a triple bottom has been formed. But it is based on gut feel. I have been frequently wrong. Technically it hasnt so pls do your own due diligence.

All the best - Bheeshma


#28

Why do want to get into a stock where the primary trend is down. Wait till the triangle gets squeezed. At that point of time, one will know whether the support ( triple bottom) holds or the resistance getting broken. 1040 is a big resistance. How are you sure that triple bottom will hold now ? Never invest/trade on assumption. We need hard data/facts. When the stocks breaks out of resistance, then it is a confirmation that support in this case triple bottom is held. One can invest for LT if the current Price is justified. Infy is no more a growth story, it is a value investment. Value trap is common in growth to value transition.

See the chart attached


(Srinivasan Sundaram) #29

5 points to note about Infosys from Morning star

http://morningstar.in/posts/40685/5-points-to-note-about-infosys.aspx


(GSApte) #30

There are some positives in “Infosys” story at the moment, as listed below:

  1. This is probably one of the large IT company which seems to have succession planning in place. The old founders have shown some vision to bring in leader in terms of “Vishal Sikka” who has product background and that has certainly helped the company since Aug 2014.
  2. Investments made by Infosys in digital transformation, analytics, cloud, cyber security and AI would help the company to serve emerging demands of clients in these areas.
  3. In 2017-18 Q1, Telecom and Energy & Utility vertical has reported growth of 4.8% and 3.7% QoQ, which seems better than peers in recent times. Some of this growth might have come by offering lower prices, but in these difficult times, this is a positive phenomenon.
  4. Revenue per employee at US$ 51,921 is up for the sixth consecutive quarter, which is again a sign of revival as compared to peers.

No one can predict stock price or P/E for that matter, so I would not comment much on that.

In my opinion, there are some negatives which Management has to take care of:

  1. Management may have to focus more on re-skilling of the employees in upcoming technologies like AI, RPA, Cloud and digital transformations. Though there is nothing new about digital transformation which has been happening since when IT became part of all industries, now it is happening at rapid pace. When traditional revenues from Application Development seems to be slowing, management need to focus on latest trends by taking employees along with them.
  2. Salary of top executives (which earlier founders have been voicing on various forums) need to be streamlined compared to average salary of IT workers/employees. When profits are growing at 2-5%, and employees see that executive salary is raised much higher than that, it seems questionable in any industry, so the IT industry as well.

I have tried putting a balanced perspective from my side.

Disclosure: Invested so views could be biased.


(vishwa.bhat19) #31

These are some points that I have with regard to Infosys based on close observation:

  1. Reluctance to thin down and cut the unnecessary fat. Infosys is still not ready to fire the employees with below average skill levels or the management personnel who have hefty salaries.

  2. Importance is still on the presentation and communication skills of employees rather than the coding skills in their arsenal.

  3. Unnecessary hiring even in these times to show that they are growing.

  4. Some of the examinations that were needed to get promotions previously have now been removed. They still exist but folks will still be promoted even if they don’t clear these exams. The main problem was that not many folks could actually clear those exams even though the exams were fairly beginner level.

  5. Stock options still being given to the managerial level folks and their high salaries are still a concern.

  6. Another concern is ignoring the internal talent and giving raises and promotions to laterals.

  7. The last and the most important fact is Sikka. I remember Graham or Buffet had told that when the CEOs start talking in languages that the common man cannot understand by using fancy terms and acronyms it is very dangerous for the company. I can see Sikka doing this constantly and this scares me a lot.


(vishwa.bhat19) #32

BOOM!!


(phreak) #33

Buyback


(abhishkjain2626) #34

First of all, Thanks for all the insightful views.

This question has been there since last year’s budget on dividend (!0lacs) tax and the frenzy behind corporate buybacks.

I understand buybacks could be done through tender or open market purchases.
Why do companies of late in India go through tender route? For retail investors, isn’t It is a slight hassle to send them a duly filled form and also theres no guarantee of them getting purchased. Infy announced it would 5% of outstanding shares, and assuming all shares are tendered, which means roughly 1 in 20 would be actually bought. So what if an investor holds only 15 shares? He misses out on the premium, right? Also what if someone doesn’t want to tender? He misses out on the premium too.

In short, this method penalises continuing shareholders for the sake of exiting ones. (Read this in one of Warren Buffett’s letters.)

So why not just purchase them from the open market? O/S shares are reduced, those who wanna exit just sell thru the routine way, and all those per-share metrics rise just as normally. Continuing shareholders don’t lose anything.
Also, when buyback price is above BV, BVPS after buyback is reduced.
I understand that the news of company buying its shares can really jack up the price. So, it can be done in a staggered manner over many months or years as some really awesome CEOs have done in the USA. (Rex Tillerson-ExxonMobil bought back around 25% of o/s shares during a period of 5 years, (read in The Outsiders)

So, why the inefficient tender route?

Thank your for your time.


(Shivram) #35

I think the key point here is that promoters will not be able to join a buyback through the market offer route, whereas they are allowed in a tender route. Hence a tender route is preferred when promoters are to be part of it. And the reason why buyback has become so popular is not because managements have started thinking their share price is undervalued. Dividend income above 10 lakhs is taxable (which was earlier tax free other than dividend distribution tax) whereas long term capital gains on buyback is not. So this is a tax efficient way for promoters and other relevant shareholders to get cash with low taxes and without diluting their stake in the company.

Also there is a 15% reservation for small shareholders (less than 2 lakh holding) in a buyback, add to that not all small shareholders will participate. So there is a good chance that even shareholders holding less than 15 shares can participate and will most likely get allotted.


(sushilkc) #36

Correct… basically Infosys is also making use of the loopholes in the system and doing what all others are doing so it is no different from others on Moral grounds or Corporate Governance.


(nitinku5021a) #37

What is immoral in that? Please understand the difference between Tax evasion and Tax avoidance.


(abhishkjain2626) #38

Any public company’s one of the bedrock principle should be that continuing shareholders should never be penalised through ‘deliberate actions’ of the company, which is clearly being violated here. Paying 1150 rupees to exiting investors clearly adversely affects continuing, loyal ones. As you will know Buybacks in the current world are usually done to prop up sagging share prices, so why not just indicate to the market that the company is open to purchase shares from the open market whenever it feels they are trading cheap.

This tender method seems to befitting the promoters, who get to sell a few hundred crores worth of shares, without their reducing any percentage ownership.

Just my opinion.


(Shivram) #39

At the outset, there is no “loss” to any shareholder if all shareholders apply for the buyback and get proportionate cash. This is just like dividend in that sense. Whether tender or market offer makes no difference. The only difference is whether the promoter wants to join in. And there is no reason why the promoter should not join in. Promoter is also a shareholder isnt it? The method chosen should be fair to all shareholders, not just to the minority shareholders. Also, a buy back should primarily be done to give back excess cash which cannot be used or if the intrinsic value of the share is more than the market price, not to “prop up sagging share price”. Market offer may be the right approach if intrinsic value is more than market price, but tender offer makes more sense to give back excess cash.

I for one always assume that promoters/management are always keen on maximising their revenue and any profits accruing to minority shareholder are only incidental (for them, not for us!) when making investment decisions. After choosing an industry that I believe has potential, my management analysis is restricted to making sure that the management is capable of doing this business well and is not absolutely unscrupulous. Examples - Ambani/Azim Premji/Anil Agarwal/NRN/Tatas/Gautam Singhania/Vijay Mallya/Dilip Sanghvi/Habil Khorakiwala - I will let the reader choose who is who as this is quite subjective. In addition, I practice diversification and margin of safety so that one or two mistakes do not significantly affect the portfolio.

In this present instance, based on the logic below, only continuing shareholders who hold more than 2 lakhs can have a reason to be aggrieved. Even in this case, I believe they will not lose much at the current offer price of 1150 even if they do not participate at all which indicates that the price of 1150 is fair.

a. A shareholder either believes the share price is undervalued, overvalued or rightly valued at 1150.
b. If shareholders believe the shareprice is undervalued or rightly valued at 1150, this will clearly be a benefit for the continuing shareholders in the long run. So there can be no grievances here.
c. A shareholder who bought shares to capitalise on the buyback opportunity is merely a speculator and has no right to complain about corporate governance.
d. If shareholders believe the shareprice is overvalued at 1150, this is where there could be a case made for the management not doing the right thing. But to circumvent this issue, the small shareholder has the option to tender all shares through the tender route (assuming the holdings are less than 2 lakh). They can then repurchase at the “right price” at a later point in time. Thus the law already provides for them.

Now the situation of the shareholder holding more that 2 lakhs is as follows. The price of 1150 was last reached on 14 Jul 2016. I am presuming this investor will sell overvalued stocks and buy rightly or undervalued stocks. The stock has reached a lowest price of 914 since 24 Jul 2016 (ignoring the latest fall). This gives that the shareholder believes the right shareprice falls anywhere between 914 and 1149. Even assuming that the right price as per the shareholder is 914, as a result of the buy back, the shareholder will lose a maximum of 1.34% - (914 * 100 - 1150 * 4.92) / (100-4.92) = 902. In my opinion, there will be enough opportunities for the shareholder to exit in the coming days. Thus my conclusion is that if there was indeed an over valuation in the buy back, it does not impact the continuing shareholders very badly.


(abhishkjain2626) #40

My apologies, and yes, now my concerns are pretty clear. Actually its the retail investor who is benefitting the most.

From BloombergQuint, ‘According to the company’s filings, 2.87 crore Infosys shares were with investors holding 200 shares or less as of March 31. If we assume a price of Rs 1,000 on the record date for Infosys, the value of the shares held by these investors will be Rs 2 lakh or less, qualifying them as retail investors.
Since Infosys will have to buy back Rs 1,950 crore(15% of 13k crore) worth of shares from retail investors, at the buyback price of Rs 1,150 apiece this works out to 1.69 crore shares. So, the ratio of the shares Infosys will buy back from retail investors to the total number of shares held by the category stands at 59 percent. And that’s the derived entitlement ratio.’