Infosys manages to beat Earnings Expectations but only because it deferred Investments…I expect it to correct to below Rs 1500

Infosys declared It’s Q1 FY 10 Results this morning…….as per IFRS……..as per Indian GAAP

I don’t see any headwind in Infosys…I will be surprised if it climbs more from the current Rs 1750 levels….Infact I expect it to drop below Rs 1500…..Read on to understand my thought track 

It has managed to show a little higher Basic EPS at Rs 25.56 than expected for Q 1 but has given a lower FY 10 EPS Guidance Range of Rs 94.59 to Rs 96 down 9.6% and 8.2% respectively yoy 

Market has reacted positively to Q 1 Results and Infosys is up 4% + at Rs 1755 with the Sensex at 13844,up 87 points just past 2.30 pm….This Price gives a Forward Multiple of 18 for FY 10

In April 2009 ,Infosys had warned of a 3% drop in margins in FY 10….This is not reflected in Q 1 as Infosys has deferred Heavy Investments to the remaining three quarters in FY 10…The margin contraction would be lower at 1.5% in FY 10 says Infosys CFO,V Balakrishnan

The Consolidated Networth of Infosys at June 30,2009 is Rs 19827 crs ( US 4.13 Billion) while the Market Cap is currently five times this at over Rs 102000 crs ( just under US $ 21 Billion) 

Infosys is cash rich and has US $ 2.51 Billion currently,that’s over Rs 12000 crs …It’s reflected in the fact that Other Income has shot up by 129 % to Rs 269 crs in Q1,indicating an 8% to 9% annual return on this…This would contribute nearly 20% of Total Profit for FY 10 !…This contribution % would move lower if Infosys does shift, as planned, some of the Cash to Business Investments…so you will probably see an Other Income Element of @ Rs 750 crs to Rs 800 crs,under 15% of projected Earnings levelsof @ Rs 5500 crs for FY 10

Now RONW in FY 2009 was 32.80 % with Infosys earning a consolidated Rs 5988 crs on Year end Networth of Rs 18254 crs…You could take the average Networth as the Denominator but the implications would remain the same…..With a near 10% decline in Earnings forecast for FY 10,the RONW will drop sharply to below 23%…In fact to maintain it’s RONW at last years levels Infosys has to register a 40% jump in Earnings !

So with no incremental Earnings and a reducing RONW will Infosys increase it’s Dividend Payout ?…In FY 09 it gave a 470% dividend…That’s Rs 23.50/share…that’s a payout of 22.5% on a Basic EPS of Rs 104.60…It’s Surplus Cash is earning just 8% to 9% pa…If the IT Business fails to generate incremental earnings and if the recovery is only in the Long Term,Infosys should reconsider to increase the Dividend payout…or,just a thought,look to diversify in another growth business…Jerry Rao of Mphasis has done this…he is also now in the Affordable Housing Sector….Infosys can extend it’s superior management capability to build yet another Business from Scratch !  

Another Interesting observation is that as per IFRS Accounting ( This is not yet mandatory),Infosys has shown in Q 1 FY 10 an Exchange Difference Gain of US $ 236 Million on Translation of Foreign Operations…this is huge…when related to the US $ 313 Million Operating Profits shown….In Q1 FY 09 it had shown a loss of US 274 Million on this account ! and this has dropped the Profits to a very negligible amount as per IFRS Accounting !….this is due to great exchange volatility

When IFRS becomes mandatory inside two years,it would really be very interesting to see if the Share Price begins to reflect the valuation as derived from IFRS Compliant Accounts…Currently it is clearly not.

Investors would be interested in what the Share Price Range would be in 2009-10…Let’s have a look…Currently it is at 18 times Forward Earnings at Rs 1750…If you want a 25% return on Infosys the Share Price must move to Rs 2200…Here the Multiple moves to 23 times…quite unlikely…..my guestimate is that it should trade in the 14-18 multiple…That is Rs 1350 to Rs 1750…it’s already at the top end of this range….Don’t see much headwind ahead…Expect a sharp correction in the short term 

 

4 thoughts on “Infosys manages to beat Earnings Expectations but only because it deferred Investments…I expect it to correct to below Rs 1500

  1. HI GAURAV
    AS USUAL UR ANALYSIS HITS BULL’ S EYE .
    THANKS FOR EXCELLENT PEICE ON INFOSYS. IT WAS TIMELY.
    I AM SENDING U SOME FIN RATIOS OF A CO . ITS NAME IS HIMALAYA INTRNATIONAL .ITS IN MARKETING OF AGRI PRODUCE
    Operational & Financial Ratios
    Earnings Per Share (Rs) 3.03 1.99 2.72 0.55 0.01
    CEPS(Rs) 3.81 2.69 3.41 1.16 0.66
    DPS(Rs) 0.00 0.00 0.00 0.00 0.00
    Book NAV/Share(Rs) 19.09 16.40 14.26 10.98 9.75
    Tax Rate(%) 3.44 -1.53 4.76 -4.27 0.00
    Margin Ratios
    Core EBITDA Margin(%) 28.23 22.15 39.05 15.60 11.45
    EBIT Margin(%) 23.52 17.17 32.18 9.44 5.35
    Pre Tax Margin(%) 18.75 14.03 28.63 5.33 0.09
    PAT Margin (%) 18.10 14.25 27.26 5.55 0.09
    Cash Profit Margin (%) 22.81 19.23 34.13 11.82 6.30
    Performance Ratios
    ROA(%) 11.33 8.42 12.88 2.56 0.05
    ROE(%) 15.85 12.13 19.08 4.97 0.10
    ROCE(%) 14.73 10.15 15.21 4.34 2.62
    Asset Turnover(x) 1.37 1.60 1.88 2.08 2.04
    Sales/Fixed Asset(x) 1.07 0.77 0.64 0.57 0.55
    Working Capital/Sales(x) 0.46 0.55 0.61 0.78 0.64
    Efficiency Ratios
    Fixed Capital/Sales(x) 93.35 129.54 156.21 175.73 180.33
    Receivable days 80.09 96.97 107.22 114.59 102.02
    Inventory Days 70.43 91.97 122.21 166.49 159.65
    Payable days 32.60 40.47 32.64 20.88 0.00
    Valuation Parameters
    PER(x) 6.58 6.88 6.62 16.09 260.00
    PCE(x) 5.23 5.10 5.29 7.61 3.92
    Price/Book(x) 1.04 0.84 1.26 0.81 0.27
    Yield(%) 0.00 0.00 0.00 0.00 0.00
    EV/Net Sales(x) 1.59 1.50 2.49 1.95 1.43
    EV/Core EBITDA(x) 5.63 6.75 6.37 12.52 11.88
    EV/EBIT(x) 6.76 8.71 7.73 20.69 25.41
    EV/CE(x) 0.99 0.88 1.18 0.90 0.67
    M Cap / Sales 1.19 0.98 1.80 0.90 0.26
    Growth Ratio
    Net Sales Growth(%) 49.08 39.93 31.61 8.27 0
    Core EBITDA Growth(%) 89.98 -20.60 229.49 40.51 0
    EBIT Growth(%) 104.24 -25.34 348.70 81.99 0
    PAT Growth(%) 89.45 -26.88 546.06 6004.61 0
    EPS Growth(%) 52.26 -26.84 394.55 5400.00 0
    Financial Stability Ratios
    Total Debt/Equity(x) 0.35 0.44 0.48 0.95 1.20
    Current Ratio(x) 13.41 6.97 8.02 7.41 5.50
    Quick Ratio(x) 8.23 3.81 4.58 3.48 2.44
    Interest Cover(x) 4.93 5.47 9.05 2.29 1.02
    Total Debt/Mcap(x) 0.34 0.53 0.38 1.17 4.51
    WAITING FOR UR TAKE ON IT
    I AM CNSIDERING LONG TERM INVESTMENT INTO THIS CO

  2. infosys is trading at 2500 🙂

    however i agree with your analysis at today’s price…it has only one way to go and that is down and my guess is that it will settle at around 2000

  3. Hi Gautam,…yes this blog was on July 10,2009 and fundamentally I had found Infosys well valued at Rs 1750…however since then it has given a 43% return by moving upto over Rs 2500 with P/E upgrading…never mess with Infosys !…I was harsh on it…..it’s got a blue pedigree,no debt and bounces back on big ticket orders,dollar rebounding and US recovery signs….yet I’m not a buyer in Infosys at Rs 2500

Leave a Reply

Your email address will not be published. Required fields are marked *