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 !   read more

Infosys begins the earnings season with a flat guidance for FY 10

Infosys has just announced their audited consolidated results for Q4 FY 09 ( Jan-March 2009) and also for the full year FY 09

For easy reference,I have summarised the performance as below

Audited Consolidated Results of INFOSYS TECHNOLOGIES LTD

 Financial Year 2008-9 ending March 31,2009

 

Rs in Crs

FY 09

at March 31,2009

FY 08

at March 31,2008

% Up

Income

21693

16692

30

Net Profit

5988

4659

28.5

Equity ( FV Rs 5)

286

286

Reserves

17968

13509

33

Networth

18254

13795

32

 

 

 

 

Book Value in Rs

319

241

32

EPS in Rs

104.6

84.53

24

Dividend in Rs

23.5

33.25

 

Dividend in %

470

665

 

Infosys has given a flattish earnings guidance for FY 10…so this 28.5% growth in Earnings in FY 09 is unlikely to be maintained in FY 10…In fact they estimate that the EPS would drop into the range of  Rs 95.65 to Rs 101.18  

Infosys has reacted by 5% to Rs 1345…that’s a forward PE for 13 to 14

Company’s Top Management voice their caution as below

  • Expect Pricing to drop by 6.5%
  • Expect Operating Margins to drop by 3%
  • Survey of 135 Clients that contribute to 83% of Revenues revelas that 60% say that their IT Budget will drop by 10% 
  • Environment continues to be challenging
  • Utilisation rate has dropped to below 68% and will remain under pressure

Clearly Infosys is expecting  tough times ahead and is being candid about it.For a first time in many years it may actually earn less in the coming year than it did in the year just concluded…I fear if the Rupee appreciates to Rs 45,the margins will come under more pressure…Currently Infosys has hedged US $ 500 Million

Don’t expect Infosys to perform brilliantly on the bourses anytime soon…at Forward PE of 13 and 14,there is a good chance  that the share price will react by atleast 20% towards Rs 1000 

Clearly the IT Sector is not going create any magic in your portfolios this Year….even if the Rupee sinks to Rs 55 and beyond,clients would leverage for further price cuts