Infosys Limited - Are we getting a discount or no?

INFY is part of all mutual fund’s bluechip offerings (HDFC, SBI, ICICI, AXIS etc), INFY is cash rich, has generated 35% return in the past 12 months (probably due to management changes), if it can generate atleast half of last year’s return (17.5%), isn’t it still a good investment? With dollar going up and the dollar appreciation yet to reflect in the balance sheet of IT companies, this is a sector with no debt and high ROCE and I believe INFY and TCS can benefit investors atleast for few more years.

From March 2014, INFY’s net profit is as follows (in crore rupees)
10,656 12,372 13,489 14,353 16,029

From March 2014, INFY’s cash from operating activity
9,825 8,353 10,028 11,531 13,218

From March 2014, INFY’s profit from operations
14172 15946 17839 19340 19963

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Q3 Results

Revenue up, good guidance , Net profit down though significantly due to some income tax related expense diff from last year.
Infy ADR up 6 %. Lets see how India mkt treats it on Monday.

Disc : Have a Trading position.

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Margins are also down due to one-off expenses, investments and slightly lower utilization.

Stuck to policy of returning 70% of profit to shareholders.

Biggest +ve surprise was strong guidance for next year and double digit topline growth in current Q.

Closing gap with TCS on growth front.

Disc: Invested 5% of PF

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Overall, in Q3, Revenue has moved up about 17% y-o-y, which looks better than competition.
Sub-contractor cost n Q3 has zoomed from 1349 to 2037 Crores i.e. 51% up, and hence overall expenses has moved up from 11520 to 14633 crores i.e. 27%.
Both look very high.
It seems that, no. of sub-contractors going up could be main reason apart from revised pay of higher management from October 2018. This could be a long term strategy of the company to have some work force as contractors rather than permanent employees, considering slow business growth in IT sector in near future.

Need to analyze the result further, since OPM reducing from 29% last year to 24% (as per screener), looks a major concern. Many large IT companies have been chasing revenue growth and that has impacted OPM of many of them post 2015. It is an indication of pricing power getting reduced in spite of growth in digital revenues which is a high margin business.

Disc: Invested.

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Contractors are required when your growth outpaces planned recruitment. It is never a strategy as it is costly affair but it is better than having to turn down biz.

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@nav_1996 : Yes, that is a good point. Since revenue growth seems to be higher than earlier forecast, there might be increase in contractors, which is common in IT industry.

Shrinking margins due to various reasons will remain a concern going forward.

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I have not fully understood the benefits of this acquisition for Infosys.
ABN AMRO has offloaded their administrative mortgage services to Infosys, and there could be limited scope to offer digitization, RPA, chat bot and AI based services in this administrative area.
I am not sure how much value would be added to core IT service offerings of Infosys by this acquisition.
In past few years, some large IT service organizations have been acquiring businesses in the area of car/auto designs, network hardware, BPO services, and that has impacted margins. Some of those acquisitions by one large IT firm was not related to its IT services business. It seems that, this is more like revenue positive and EBITDA margin negative strategy.
Though Infosys may not have done this in the past, we need to watch its future strategy closely.

Disc: Invested for past 3-4 years.

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This is for BPO. They have fairly large presence in BPO.

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Q4 FY19:
Revenue up: 21,539 Cr vs 18,083 Cr (19.11%)
PAT up: 4,074 Cr vs 3,690 Cr (10.51%)
Margin down: 24% vs 27%
EPS up: 9.39 vs 8.48 (10.73%)

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Some interesting findings on Infosys’ journey from IPO to now:

  • If you held on to your Infosys shares since their listing in June 1993 till now, you would have made a CAGR return of 42.1%. Your money would have multiplied 9544 times.

  • If you were extra smart and you sold out at the peak PE ratio of 322x on 8th March 2000, you would have made a CAGR of 203%. Your money would have multiplied 2326 times in just 7 years.

  • Interestingly, even if you bought the stock at the huge PE of 322x on 8th March 2000 and held on to your shares till now, you would have still made a CAGR of 7.5%.

This seems a respectable return considering that:

  • The stock was bought at an astronomical PE & it underwent a huge PE compression from 322x to 22x as on date

  • the stock did not regain the 8th March 2000 price for the next 6 ½ years (needed loads of patience)

  • the 7.5% is a compounded return unlike the simple interest you receive in a bank fixed deposit.

  • From the peak PE of March 8th, 2000, the stock fell 85% over the next 18 months. The market provided ample opportunity to buy the stock & improve your return over the 7.5% CAGR.

  • The dividend pay-out ratio increased from 15% in FY1994 to 69% in FY2019. This makes sense as large doses of free cash flows were reinvested in the initial years, in a business which was growing fast & at high RoE/RoCE.

Once growth slowed down, high pay outs provided a reasonable dividend yield (2.8% at present) and a downside cushion to the stock price.

Analysis FINAL.pdf (171.9 KB)

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Nice Analysis …
Just curious to know

  1. What was allotment price and ratio (I somewhere read IPO was undersubscribed)
  2. What is listing / Day 1 closing price
  3. What is current dividend yield on IPO price.
  4. Year 18 sales was 70,522 Cr and year 19 sales was 82,675 Cr but the PAT has come down from 16,100 to 15,410. The expense growth is almost equal to the sales growth. What are the reasons.
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  1. Issue barely got subscription. Investment bankers bailed it out. Morgan Stanley had to take a 13% stake to bail it out.

  2. Issue opened at Rs 145

  3. On one IPO share of Rs 95 in 1993, you received Rs 22,016 as dividend in FY2019.

  4. Partly due to lower other income, reversal of Rs 1432 cr tax expense in FY18 pertaining to previous period thus optically much higher tax in FY19 (page 33 of FY19 bs) and fall in overall margins.

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Any one working in Infosys , please provide current state of this company. Earlier I worked for TCS and now I am working for MNC. But I own both TCS and Infosys in my Core PF. Planning to sell Infosys soon and continue only one stock from large cap IT Space.

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high impact expected in Infosys shares, CEO in trouble again

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One more largecap fudged accounts. Too many frauds in Indian listed companies for past few months.