Stock Fundamentals

Investment Focus: Infosys - Buy


Despite delivering a good set of numbers quarter after quarter, the Infosys stock has been beaten down due to the company's gloomy forecasts.

However, the reaction to the forecasts may be overdone. The company has managed steady volumes (person-months billed) and pricing, expansion in verticals such as retail, manufacturing and the key BFSI segment and a stream of large-deal wins.

The correction in prices has made the Infosys stock an attractive proposition for investors with a two year horizon. At Rs 2,585, the stock trades at 15 times its likely per share earnings for FY13. This is much lower than the historic levels it has traded at and is at a significant discount to peer TCS. Cash amounting to Rs 343 per share provides added cushion to valuation.

In the first nine months of FY12, Infosys witnessed a 22. per cent increase in revenues to over the same period last year to Rs 24,882 crore, while net profits rose 19.9 per cent to Rs 6,000 crore. This was helped by the rupee depreciating over 12 per cent against the dollar between October-December.

Despite the uncertain global scenario, the company has seen no project pullbacks or cancellations across segments and geographies. There have also been no significant discount requests from customers means. Overall, there are no leading indicators to suggest a depressing year ahead.

Business positives

Infosys has added as many as 31 clients in the $50-90 million bucket over the past one year. Recently, it has also won two deals worth $500 million each. This ensures a fair degree of revenue visibility and suggests continuing customer confidence to outsourcing large projects.

Over the past 3-4 quarters, while the key BFSI segment has been growing at a slightly lower pace than the overall company rate, other segments such as retail, life sciences and manufacturing have been growing at a much faster pace. This has created a well-blended vertical-mix for Infosys, and suggests broad-based demand for its services.

North America and Europe haven't seen any decline in projects and the latter has in fact been growing at a sound pace and seeing some large deal wins from economically ‘stronger' countries such as the UK, Germany, France and Switzerland.

Though lower-margin services such as application development and maintenance and testing have grown faster than offerings such as consulting and system integration, this may be more a function of customers going slow on discretionary spends.

Infosys is also continuously increasing the proportion of fixed-price contracts (currently 41 per cent of revenues), that give better realisations vis-à-vis time and material projects. Any wage hikes to stem attrition (at an uncomfortable 15.4 per cent), may hurt margins.

Published on January 14, 2012

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