October 12, 2005

Infosys Technologies results – some thoughts

As expected, infosys declared great results with q-o-q growth of 10 %. The annual guidance has been raised to Rs 90 EPS and the Total revenue guidance is 2.14 Bn USD.

The stock sells are around 2675 which equates to a forward PE of around 29.5.

I have always had a bearish opinion on the valuation from a long-term standpoint( analysing an IT services company and dollar-depreciation-will-stress-test indian offshore model ) . Some key concerns for me have been

  • Sustainability of the 30 % + operating margins. Indian companies really don’t have patent on off shoring. Accenture and IBM are scaling up their Indian operations well. There very very few companies which have had such margins globally for a very long period of time ( Only monopolies like Microsoft )

  • Impact of a dollar depreciation over long term on the profit margins

  • Huge reliance on US for growth and revenue

  • Cost pressures ( salary etc)

That said, my bearish viewpoint has somewhat reduced in the recent past. I was looking the financial numbers of Accenture. Accenture sells at around 25 usd and has a trailing PE of 14. The revenue numbers are around 15 Bn usd and the ROC capital for accenture is 50 % +.

If infosys were to continue to do well and eventually grows to the size of accenture ( and this is the big question ), then the current valuations are justified or the company is slightly undervalued. But if anything were to go wrong, like dollar crash or a recession or continued increase in the salary costs in the interim then the stock price could get punished.

Maybe worth holding onto the stock. But not worth selling ?

Ps : I own infosys stock ( used to work for infosys in the past )


ValueArchitects said...

The fact that Indian economy is 50% dependent on services, makes hype about IT/Infy scary. Include into it the effects of effects - aka - job losses/salary drops/etc due to some goofup in US - it will lead to a big drop in consumerism in India, which will have an affect on other sectors in the economy.

Secondly - Checking out nos in other industries in the country, Infosys performance looks nothing exceptional, but OK. For ex-HH/Bajaj- they are generating better FCFs - but maybe Infy will always remain in hype b'cos of its strong shareholder orientation,etc vs these desi companies.

All said and done- we have a habit of extending the recent past into distant future. I dont see any reason, why Infy shouldnt CRASH big time with a whiff of problem in US/blore, etc - there is no margin of safety - there is no reason of holding it!
So enjoy "your" infy till the music lasts.

Rohit said...

i agree with several of your points and which is why i have said 'if' (which is a big if) infosys were to grow to the size of accenture , the current valuation may be justified. however that is a long term arguement. in the short term anything can go wrong.
i have not read bajaj/ HH annual report and would not be able to comment on that. The point worth noting for infosys is that it has huge cash flows and phenomenal return on equity ( > 100 % on tangible assets). sustainability of these returns is obviously a key point. not too many companies outside the IT services enjoy that kind of returns.
in addition when a company sells at a PE of > 20 - 25 , there is definitely an element of faith / optimism built into it. some companies may fullfil it (ex : microsoft, dell or IBM ), but most will not.
on a personal level, my analysis can never be completely rational as i have worked in the company for several years and have had very good association with it.

ValueArchitects said...

I understand that! Whose bread I eat, his song I sing.

However wat irks me the most in case of Infy is their indiscriminate issue of shares, and poor dividend payment (not many people will digest this - but if you look into cash flow statement closely, u will understand....)

If I am a shareholder in Infy, I will share the burden of expansion (entertaining campus/hotel/golf,etc), rather than reap the rewards of myshareholding. While all these entertaining campuses can be done with the internal accruals, Infy is indiscriminately issuing shares to FIIs - that too when their cash-kitty swells. Also, I dont understand their apathy towards debt - on one hand they proclaim themselves as a (stable business model) services company - on the other hand, they want to play like a product company and maintain riskless-debt-free books????

I think, Infy, in its bid to expand, is actually screwing small shareholder and keeping FIIs happy!

ValueArchitects said...

BTW, (fyi) Bajaj results are out - 30% topline yoy, and 40% OP yoy!