The Ever-Green Infosys Is A BUY Even Now

Infosys Analysis:

Envisaging dimensions of growth and globalisation, achieving new milestones over the last decade, the Information Technology (IT) sector has led economic transformation of the country and altered the perception of India in the context of global economy. IT is one of the largest sectors in India, and world’s largest sourcing destination for IT at USD 125-130 billion market which account for approximately 67 per cent of the total world.

One of the biggest factors that has helped India to make its mark on the world map is its booming IT industrial arena. The contributions being made by the IT industry towards the country's GDP has led to a steady growth of the Indian economy. IT sector has helped the domestic economy to integrate with the world economy. It has made significant impacts on the lives of many people. It has also helped people settled in far flung topographies to connect with the rest of the world.

The contribution of the IT sector to India’s GDP rose to approximately 9.5 per cent in FY15 from 1.2 per cent in FY98.  India’s technology and BPM sector (including hardware) is estimated to have generated USD 146 billion in revenue during FY15 compared to USD 118 billion in FY14, implying a growth rate   of 23.72 per cent. The top six firms contribute around 36 per cent to the total industry revenue, indicating the market is fairly competitive.

The Indian IT and ITeS industry is divided into four major segments – IT services, business process management (BPM), software products and engineering services, and hardware. It employs about 10 million work force.

About Company:

Infosys is a global leader in consulting, technology, and outsourcing and next generation services. It enables clients in more than 50 countries to outperform the competition and stay ahead of the innovation curve. With USD 9.21 billion of revenues in third quarter of FY16 and 193,000 plus employees, it is helping enterprises renew themselves while also creating new avenues to generate value, transform and thrive in a changing world through strategic consulting, operational leadership and the co-creation of breakthrough solutions, including those in mobility, sustainability, big data, and cloud computing. It also provides enterprises with strategic insights on what lies ahead.

The Business

After appointing Vishal Sikka as the first time outsider as Chief Executive Officer (CEO), Infosys management took a mission to achieve an aspirational goal of USD 20 billion in revenue by calendar 2020 with at least 30 per cent operating margin.

Recently, industry body NASSCOM projected a lower outlook of 10-12 per cent growth for India’s USD 146 billion IT sector in 2016-17 versus 12.3 per cent growth in the year ending 31 March. When Infosys shared its aim of becoming a USD 20 billion firm by 2020 in last April, it meant the firm had to grow at an annual compounded growth rate of 18.11 per cent a year from its revenue of USD 8.7 billion in 2014-15.

Uncertainty over a global economic recovery is making many large global banks (which spend the most on IT put their technology spending on hold. To achieve its goal through all these conditions, Infosys will have to look at buying firms that will shore up revenue, versus its strategy of investing in firms that have new-age technologies and will help over the longer term, furthering Sikka’s ambition of bringing USD 1.5 billion in business from mergers and acquisitions.
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Its tie-up with conglomerates such as General Electric on cloud computing platforms (GE Predix) is a case in point. This will require Infosys to now grow at a higher compounded growth rate of 20.4 per cent. The change in approach has helped Infosys increase the number of large deals to USD 800 million from $400 million in the year-ago period.

Further the company is also adopting many techniques like mission to increase revenue per full time equipment (FTE) to USD 80,000 by deploying automation and innovation in existing businesses, adoption of new strategies like New and Renew and Zero Distance Initiative, contribution from new services such as design thinking, solution in artificial intelligence and intellectual property led businesses.

Acquisitions:

The company’s one of most important strategies is to grow through inorganic way by acquiring companies or investing in domains related to their core business. The strategy is looking aggressive as Infosys completed acquisition of three companies namely Panaya Inc., Skava, Noah Consulting LLC in 2015 for USD 390 million and launched the USD 500 million Infosys Innovation Fund to invest entrepreneurial ventures delivering innovation.

Infosys is the sole investor in the Fund, and invests on the basis of finding and forging strategic fits that also bring adequate financial return. Infosys’s approach of picking minority stakes in start-ups focused on new-age technologies underlines Vishal Sikka’s so-called ‘New and Renew’ strategy to reinvigorate the company.

From the time Infosys launched the fund they have made seven investments till date and spent USD 29.4 million to buy stake in six start-ups and invested an undisclosed amount in September to become a limited partner in Vertex Ventures, a Palo Alto-based venture capital firm. It made investments in Waterline Data Sciences, WHOOP, CloudEndure, Airviz Speck, ANSR Consulting and NOVA.
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Infosys is definitely looking at growth from these acquisitions as it invested in 10 companies in last one year. This is a significant achievement as it just acquired 4 companies in its lifetime before 2015. The last acquisition before 2015 is in 2012 when it acquired Lodestone Holdings.

Breaking down Inorganic growth, it is seen often as a faster way for a company to grow when compared with organic growth. In many industries, especially in technology, growth is often accelerated through increased innovation, and one way for firms to compete is to align themselves with those companies that are developing the innovative technology.

Financials:

Financially, Infosys has been facing positive headwinds with revenue increasing by compounded annual growth rate (CAGR) of 15 per cent over the period of five years. During the same period company’s EBITDA (earnings before interest, depreciation and amortization) CAGR increased by 12 per cent. CAGR of employee expenses saw hike of 15 per cent in last 5 years. CAGR of Profit after Tax (PAT) too saw a jump of 13 per cent in the last five years. The improving financial performance has also been reflective on the share price of the company as the stock has inclined by more than 48 per cent in last 5 years.

On a consolidated basis, the company’s total revenue from operations for FY15 increased by 7.50 per cent to Rs 56749 crore from Rs 52797 in the previous fiscal. The EBITDA also increased to Rs 18301 crore from Rs 16045 crore, representing a growth of 14 per cent year on year (YoY). The EBITDA margin stood at 32.25 per cent for FY15 compared to 30.39 per cent same period last year. The increase in EBITDA is on back of the slow increase in employee expenses which increased by 3.37 per cent YoY in FY15 and reached to Rs 29802 crores compared to Rs 28831 crores in FY14. The employee expenses consist of 53 per cent of total revenue. The net profit of company stood at Rs 12373 crores compared to Rs 10656 crores in FY14 an increase of 16.11 per cent from the previous year. The net profit margin stood at 21.80 per cent in FY15 compared to 20.18 per cent in FY14.

On quarterly basis in Q3FY16 the company beat the revenue expectation for third consecutive quarter. The company provide The consolidated net revenue from operations reached Rs 15902 crores in Q3FY16 compared to Rs 15635 crores in Q2FY16 an increase of 1.70 per cent quarter on quarter (QoQ). The EBITDA stood at Rs 4761 crores this quarter compared to Rs 4786 crores in Q2FY16, a decrease of 0.52 per cent QoQ. The employee expenses of company increased by 2.57 per cent QoQ to Rs 8772 crores from Rs 8558 crores in Q2FY16. The net profit stood at Rs 3465 crores in Q3FY16 compared to Rs 3398 crores in Q2FY16, an increase of 1.97 per cent QoQ. The net profit margin stood at 20.74 per cent this quarter compared to 20.69 per cent previous quarter.

The nine month ending consolidated net revenue from operations increased by 15 per cent and reached Rs 45891 crores, compared to Rs 39908 crores during the same period last year. The operating profit stood at Rs 11400 crores, an increase of 9.79 per cent. The net profit for the same nine-month period stood at Rs 9894 crores, compared to Rs 9232 crores, an increase of 7.17 per cent from same review period last year.

The revenue in USD terms reached to USD 2407 million in Q3FY16 compared to USD 2392 million in Q2FY16 an increase of 0.6 per cent QoQ and 8.5 per cent YoY. In constant currency (CC) terms revenue growth stands at 1.1 per cent QoQ to USD 2418 million from USD 2412 million in Q2FY16. YoY revenue in CC terms increased by 12.5 per cent to USD 2495 million this quarter from USD 2295 million same period last year.

Segment-wise for FY15 29 per cent of revenue comes from financial services which grew by 6 per cent YoY. Manufacturing contributes to 22 per cent and it increased by 8 per cent YoY. Retail contributes to 16 per cent increased by 4 per cent YoY. Energy and utilities contributes to 16 per cent and increased by 8 per cent YoY. Life Science and Growth markets combined contributes to 16 per cent and increased by 5.5 per cent YoY.     

For FY15 in Geographical segment, North America which contributes to 62 per cent of total consolidated revenue increased by 7.8 per cent YoY. Europe and India which in combined contribute to 26 per cent, sequentially increased by 4.7 and decreased by 0.8 per cent respectively. Rest of the world which contributes to 12 per cent of the total revenue increased by 3.8 per cent YoY.

On valuation basis the trailing twelve month (TTM) P/E of company is at 19.69 compared to industry P/E of 20.84. The EPS for FY15 stood at Rs 108.26 compared to Rs 93.25 same period last year. The EV/EBITDA of company which takes market value of company’s equity, debt and preference share in consideration stood at 15.6 for FY15 compared to 17.7 same period last year.

Conclusion:

For the quarter, the company continued its large deal win momentum. Infosys using Design Thinking has helped the firm more than double its share of large deal wins from less than USD 400 million in a quarter to USD 900 million in a quarter. If Infosys is able to garner significant incremental revenue then Zero Distance, along with the other user-centric approach of Design Thinking, would emerge as two of Sikka’s most successful initiatives since he took over as the first non-founder chief executive officer of Infosys in August 2014.

Driven by strong volume growth in Q3FY2016 coupled with strong deal wins and healthy deals pipeline, the management remained upbeat on growth prospects, considering pros and cons, Infosys still remains a BUY