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September 15, 2014 I n f o s y s L t d (INFY-NYSE) Current

September 15, 2014

Infosys Ltd

(INFY-NYSE)

Current Recommendation

NEUTRAL

Prior Recommendation

Outperform

Date of Last Change

04/08/2014

Current Price (09/12/14)

$59.63

Target Price

$63.00

SUMMARY DATA

SUMMARY

Infosys is a leading provider of business consulting, technology, engineering and outsourcing services worldwide. We are maintaining our Neutral recommendation on the stock with a target price of $63. The company reported strong first-quarter 2015 results with growth across both the top and bottom lines. Profits during the reported quarter were driven by the company s differentiating strategy to capture potential opportunities and carry on organizational changes. Furthermore, the company has signed new deals that are expected to drive profits going forward. However, the high attrition rates and a persistent volatility in exchange rates remain as concerns for the company. At the same time, a stiff competition from technology peers can prove to be a headwind.

from technology peers can prove to be a headwind. 52-Week High 52-Week Low One-Year Return (%)

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

P/E using TTM EPS

P/E using 2015 Estimate

P/E using 2016 Estimate

Zacks Rank *: Short Term

1 3 months outlook

* Definition / Disclosure on last page

$63.01

$47.88

25.52

1.37

1,055,517

571

$34,073

10.55

17

22

$0.72

1.21

13.9

8.3

-0.1

18.5

17.7

16.2

3 - Hold

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Below Avg.,

Large-Growth It Services 71 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

2013

2014

2015

2016

Q1

Q2

Q3

Q4

Year

(Jun)

(Sep)

(Dec)

(Mar)

(Mar)

1,752 A

1,797 A

1,911 A

1,938 A

7,398 A

1,991 A

2,066 A

2,100 A

2,092 A

8,249 A

2,133 A

2,201 E

2,263 E

2,296 E

8,893 E

 

9,709 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Jun)

(Sep)

(Dec)

(Mar)

(Mar)

2013

$0.73 A

$0.75 A

$0.76 A

$0.78 A

$3.02 A

2014

$0.73 A

$0.73 A

$0.81 A

$0.85 A

$3.12 A

2015

$0.84 A

$0.81 E

$0.85 E

$0.86 E

$3.36 E

2016

$3.68 E

Projected EPS Growth - Next 5 Years %

14

© 2014 Zacks Investment Research, All Rights reserved.

10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW

Founded in 1981, Infosys Technologies Ltd. (INFY) is the second largest IT services company in terms of revenue in India. Headquartered in Bangalore, India, the company enables its clients to leverage its performance by utilizing its proprietary Global Delivery Model (GDM). Infosys relies on its GDM for the efficient and economic development of its business solutions, which enables the company to design IT platforms from initiation to completion and carry on ongoing maintenance using its workforce on-site and/or at its development centers located in India and abroad.

The economic cost structure and quality control measures ensure the desired quality and scheduled project execution within a set timeframe; cheaper than if all the personnel were on-site. The range of services offered by INFY includes:

Custom Application Development Infosys is able to create new customized software solutions for its clients, and can increase Infosys is able to create new customized software solutions for its clients, and can increase the functionality of existing software solutions. These projects vary, but are typically longer than one year and include all aspects of the software development from designing and prototyping to integration and installation across several software platforms including J2EE, Linux, and Microsoft s .Net platform.

Maintenance and Production Support Offering a team of consultants based in India that works to provide maintenance and support Offering a team of consultants based in India that works to provide maintenance and support functions for existing software systems across a wide range of technologies, Infosys helps its clients to reduce its maintenance costs. Infosys also deploys a small group of consultants on-location for its clients to help streamline and coordinate its support functions.

Software Re-engineering This service helps its customers to convert its existing IT Systems to newer technologies and This service helps its customers to convert its existing IT Systems to newer technologies and platforms developed by third-party vendors. An example of this type of service would be for Infosys to help a client move from a client-server platform to an Internet platform.

Package Evaluation and Implementation Infosys is able to assist its clients in the evaluation and implementation of third-party software Infosys is able to assist its clients in the evaluation and implementation of third-party software packages and provides training and support services in the course of implementation. Its specialty is in enterprise resource planning packages developed by vendors such as SAP or Oracle, Business Intelligence packages from vendors such as Business Objects and Cognos, and enterprise application integration packages from vendors such as IBM and TIBCO.

IT Consulting The company s consultants offer technical advice in developing and recommending appropriate IT architecture, hardware The company s consultants offer technical advice in developing and recommending appropriate IT architecture, hardware and software to deliver IT solutions designed to meet the specific business needs of its clients.

Business Process Management (BPM) Services - through its subsidiary Progeon, Ltd. Infosys offers its customers to outsource several process-intensive functions - through its subsidiary Progeon, Ltd. Infosys offers its customers to outsource several process-intensive functions related to Customer Relationship Management, Finance and Accounting, and Administration and Sales Order Processing.

Other Solutions Other solutions consist of new offerings that are expected to grow as the company expands Other solutions consist of new offerings that are expected to grow as the company expands its businesses and currently include: Testing Services, Engineering Services, Operations and Business Process Consulting, Systems Integration, and Infrastructure Management Services.

Infosys markets its services to large enterprises in North America, Europe and the Asia Pacific region. The company has a strong market presence in North America and is working towards expanding its presence in Europe.

Infosys has in-depth expertise in the financial services, manufacturing, telecommunications and retail industries. The company also has exposure to the utilities and logistics industries as well.

The company also has exposure to the utilities and logistics industries as well. Equity Research INFY

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REASONS TO BUY

Infosys relies on its Global Delivery Model (GDM) for the efficient and economic development of its business solutions, which Global Delivery Model (GDM) for the efficient and economic development of its business solutions, which enables the company to design IT platforms from initiation to completion and carry on ongoing maintenance using its workforce on-site and/or at its development centers located in India and abroad. The economic cost structure and quality control measures ensure the desired quality and scheduled project execution within a set timeframe, cheaper than if all the personnel were on-site. The company has also realigned its business portfolio to further enhance its focus on deepening client relationships, increasing market share and creating service differentiation through innovation and agility.

Infosys brings together its expertise and core competence in consulting, IT services and business process management to create solutions expertise and core competence in consulting, IT services and business process management to create solutions that allow clients to transform their businesses, optimize operations and drive innovation, thereby making them more competitive in their operating market. The company s suite of comprehensive, end-to-end business solutions that leverage technology enable it to offer services through its broad network of relationships, increase the dialogue with key decision makers within each client, and increase the points of sale for new clients. As a result, Infosys is able to capture a greater share of its clients' budgets. In the first quarter of 2015, Infosys won 20 new contracts in the innovative big data and cloud offerings market and has executed more than 260 deals in these areas year to date.

Infosys intends to acquire companies or develop alliances that complement its core competencies. The company s alliance strategy acquire companies or develop alliances that complement its core competencies. The company s alliance strategy is targeted at partnering with leading technology providers, which allows it to take advantage of emerging technologies in a mutually beneficial and cost-competitive manner. Infosys recently collaborated with SAP to develop new mobile applications for the retail industry to enable consumer packaged goods (CPG) companies to contact with sales representatives and merchandisers anytime, anywhere through wireless tablets and smartphones.

The company has been benefiting from the return of its co-founder Narayana Murthy as the Executive Chairman of the Board in Jun return of its co-founder Narayana Murthy as the Executive Chairman of the Board in Jun 2013. In order to revive and stabilize the wailing IT bellwether, Narayana Murthy, came out of his retirement to take charge of the stranded ship amid declining top and bottom lines, lower margins, high attrition and loss of businesses to competitors. After joining, Murthy focused on winning large deals while maintaining the market share. Secondly, he addressed the high operating costs of the company through a cost-optimization strategy and decided to retrench non-performing highly paid employees who were perceived to add no significant value. At the same time, Murthy emphasized on improving employee morale through efficient rewards for avid performers.

REASONS TO SELL

The company business is highly prone to the currency volatility between the Indian Rupee and the U.S. Dollar as majority of its revenues currency volatility between the Indian Rupee and the U.S. Dollar as majority of its revenues are derived from the U.S. markets. The recent appreciation of the rupee against the U.S dollar can have severe implications for the company s business. During fiscal 2014, fiscal 2013 and fiscal 2012, there was volatility in the exchange rate of the Indian rupee against the U.S. dollar. During fiscal 2014, 2013 and 2012, the average exchange

rate for one dollar was

2013 and 2012, the average exchange rate for one dollar was 60.75, 54.54 and 48.10 respectively.

60.75,

2012, the average exchange rate for one dollar was 60.75, 54.54 and 48.10 respectively. Spending on

54.54 and

average exchange rate for one dollar was 60.75, 54.54 and 48.10 respectively. Spending on technology products

48.10 respectively.

Spending on technology products and services is subject to fluctuations depending on many factors, including the economic environment in the markets in subject to fluctuations depending on many factors, including the economic environment in the markets in which the clients operate. There was a decline in the growth rate of global IT purchases in the latter half of 2008 due to the global economic slowdown. This downward trend continued into 2009, with global IT purchases declining due to the challenging global economic environment. Further, Reduced IT spending in response to the

challenging global economic environment. Further, Reduced IT spending in response to the Equity Research INFY |

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challenging economic environment has also led to increased pricing pressure from the clients, which has adversely impacted the company s revenue productivity, defined as revenue divided by billed person months. During fiscal 2013, Infosys revenue productivity on a blended basis, for services other than for business process management, decreased by 3% when compared to fiscal 2012.

Infosys operates in a highly competitive and rapidly changing market . The company expects intensified competition from some tech highly competitive and rapidly changing market. The company expects intensified competition from some tech biggies like Accenture, Deloitte etc. and may also experience rivalry from new competitors. In particular, the company expects increased competition from firms that strengthen their offshore presence in India or other low-cost locations and from firms in market segments that Infosys has recently entered.

The company has also been facing severe problems pertaining to employee attrition , given the tough competition from peers. Apart from competition, the junior employees employee attrition, given the tough competition from peers. Apart from competition, the junior employees have also been exiting to pursue higher education. In fiscal 2014, the company s attrition rate (excluding subsidiaries) increased to 18.7%, compared with 16.3% in the prior- fiscal. Though the company has been taking initiatives to augment its employee retention strategies, persistently high attrition rates remains a cause of concern as the cost of training new individuals is significantly high for Infosys.

RECENT NEWS

Infosys Technologies Q1 Earnings and Revenues Beat Estimates- Jun 30, 2014

Infosys Technologies Ltd reported first-quarter fiscal 2015 results. Quarterly earnings per ADS from continuing operations came in at $0.84, surpassing the Zacks Consensus Estimate of $0.76 by 10.5%. Quarterly earnings were up 15.1% year over year and 1.2% sequentially. Profits during the quarter were primarily driven by large deal wins, along with cost-optimization efforts and strong focus on increasing productivity and utilization. However, high attrition remains a cause of concern.

Quarter Details

During the quarter, total revenue generated was $2.13 billion, up 7.1% year over year and 2% sequentially. Revenues also surpassed the Zacks Consensus Estimate of $2.11 billion. The company witnessed volume growth, client additions, significant deal wins and increased sales momentum in its big data and cloud offerings. In the first quarter of 2015, Infosys won 20 new contracts in the big data and cloud offerings market and has executed more than 260 deals in these areas to date.

The company added a total of 61 clients and also formed partnerships with clients to create innovative solutions such as cloud-based version of its Clinical Trial Supply Management solution, to help life sciences companies enhance the efficiency of clinical trial processes during the quarter. Further, Infosys signed large outsourcing agreements across various sectors such as Energy, Communications, Financial Services and Government.

Revenue by Geographical Segment

During the reported quarter, Infosys reported strong sequential growth in geographic revenues. Revenues from North America grew 3.7% while the same in Europe and India declined 1.1% and 6.9%, respectively. However, Rest of the World reported revenue growth of 1.9%.

Revenues by Industry Segment

Revenues in the Insurance, Banking and Financial services (IBFS) grew 1.8% while the Manufacturing segment (MFG) revenues improved 2.6%. Revenues from the Retail and Life Sciences division (RCL)

(MFG) revenues improved 2.6%. Revenues from the Retail and Life Sciences division (RCL) Equity Research INFY

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rose 2.1% while revenues in Energy, Utilities, Communications & Services (ECS) grew 1.6% year over year.

Income

The company recorded an operating profit of $536 million compared with $468 million in the prior-year quarter, reflecting an increase of 14.5%. The operating margin expanded 161 basis points year over year to 25.1% from 23.5% in the comparable prior-year quarter. Net profit after tax deductions came in at $482 million for the quarter, up 15.3% year over year.

Cash

Infosys maintains a strong liquidity position with cash & cash equivalents of $4.2 billion as of Jun 30, 2014 as against $4.3 billion as of Mar 31, 2014.

Outlook

Management reiterated its outlook for fiscal 2015 projecting a revenue increase in the range of 7% to 9%.

its outlook for fiscal 2015 projecting a revenue increase in the range of 7% to 9%.

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VALUATION

VALUATION

Infosys current trailing 12-month earnings multiple is 18.5X, compared to the 23.3X average for the peer group and 18.4X for the S&P 500. Over the last five years, INFY s shares have traded in a range of 12.9X to 30.3X trailing 12-month earnings. The stock is trading at a discount to the peer group based on forward earnings estimates.

Our long-term Neutral recommendation on the stock indicates that it will perform in line with the broader market. Our target price is $63.00 or 18.8X 2015 EPS, which is well within the historical range.

Key Indicators

which is well within the historical range. Key Indicators   P/E P/E 5-Yr 5-Yr   P/E
 

P/E

P/E

5-Yr

5-Yr

 

P/E

P/E

Est. 5-Yr

P/CF

P/E

High

Low

F1

F2

EPS Gr%

(TTM)

(TTM)

(TTM)

(TTM)

Infosys Ltd. (INFY)

17.7

16.2

14.2

17.4

18.5

30.3

12.9

Industry Average

73.9

39.4

14.3

23.8

23.3

141.1

22.6

S&P 500

17.1

16.0

10.7

15.4

18.4

27.7

12.0

CDW Corporation (CDW) Premier Alliance Group Inc. (PIMO)

14.0

12.8

11.6

10.2

14.7

15.5

13.1

Science Applications International Corporation (SAIC)

16.8

15.0

6.0

18.6

19.2

18.5

16.8

Amdocs Ltd. (DOX)

16.3

15.2

8.3

13.2

17.0

17.1

12.2

TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/B

Last

P/B

P/B

ROE

D/E

Div Yield

EV/EBITDA

Qtr.

5-Yr High

5-Yr Low

(TTM)

Last Qtr.

Last Qtr.

(TTM)

Infosys Ltd. (INFY)

Industry Average

S&P 500

4.3

7.6

3.3

24.7

0.0

1.2

11.2

89.3

89.3

89.3

12.0

1.1

0.6

-62.3

4.6

9.8

3.2

23.1

1.9

89.3 89.3 89.3 12.0 1.1 0.6 -62.3 4.6 9.8 3.2 23.1 1.9 Equity Research INFY |

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Earnings Surprise and Estimate Revision History

Earnings Surprise and Estimate Revision History Equity Research INFY | Page 7
Earnings Surprise and Estimate Revision History Equity Research INFY | Page 7

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DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of INFY. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform - 16.5%, Neutral - 77.1%, Underperform 5.8%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

Analyst: Prachi Jhunjhunwala Content Editor: Vandana Shajan QCA: Supriyo Bose Reasons for Update: 1Q15 Earnings

Content Editor: Vandana Shajan QCA: Supriyo Bose Reasons for Update: 1Q15 Earnings Equity Research INFY |

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