Infosys Technologies: To Buy or Not to Buy

By Priya Nigam

India’s IT services and BPO sector has burgeoned into a $40-billion industry, backed by a thriving US economy. The US contributes about 60% of the revenues for this industry and, with the US now struggling, there is widespread concern over how well this industry can manage to stay afloat. IT firms that export to the US have not only been hit by the downturn in demand, but also by the plummeting dollar. Bearish sentiments triggered by these factors have been maintaining constant pressure on the Sensex.

Infosys Technologies, India's second-largest exporter of software services, had reported slightly disappointing results for the seasonally weak third quarter. The market is now eagerly awaiting the fourth quarter results. The company has guided to revenues of between Rs4,477 crore and Rs4,501 crore for the quarter ended March 2008. This represents 4.8% - 5.4% growth. Market expectations are for a slightly higher 6% growth in revenues. The guidance for EPS is at Rs21.38, or 5.3% growth. In comparison, rival Tata Consultancy Services and Wipro are expected to report similar revenue growth, but lower net profit growth for the quarter.

Infosys will likely meet the market expectations for the fourth quarter. It would not be surprising, however, to see the company announce disappointing guidance for fiscal 2009. CNBC-TV18 quoted Bhavin Shah of JP Morgan as saying in an interview, “We think they (Infosys) will guide to somewhere around Rs91-92 per share (the current EPS is at Rs94.80) and anything above Rs90 is good enough in terms of expectations and where they are, it should not show any disappointment. We are expecting them to guide to about 17% EPS growth in rupee terms.” JP Morgan has a Rs1,875 price target for Infosys.

Investors are hard to impress these days and it would take a lot for Infosys to really amaze the market and witness a surge in its share price. This is because the market is overly cautious due to fears of a US recession as well as record inflation in the domestic market. Moreover, the company’s PEG has crossed 1, which is not a very good sign for investors.

Trading significantly below their 52-week high, the company’s shares are already feeling the heat. With the share price having declined by about 19% over the last three months, the market has already accounted for the challenging environment. So, it may seem that a good earnings report by Infosys will boost shares. However, I doubt this. Since the concerns that are exerting pressure on the shares are not company specific, even a good earnings report may not do much to push the stock higher. The stock market as a whole is likely to exhibit inflation-related concerns at least in the near term. This situation, however, creates a good opportunity (for the brave-hearted!) to buy the shares of a healthy company at a reasonably good price.

• Infosys may be on an acquisition spree soon

• The Bears in Action – Why is the Indian Stock Market Down?

Two value stocks to buy at present

By Vipin Agnihotri

Take a look at two value stocks identified by The India Street.

Tata Consultancy Services (TCS)

As was the case with other IT stocks, Tata Consultancy Services was under selling pressure and fell from around Rs 1,300 in February 2007 to Rs 800 in January 2008. At this moment of time, it is trading at around Rs 899.95.

When I analyzed this stock, I found that its profitability growth has slowed down from 43 per cent in March 2007, to 24 per cent in December the same year. Point to be noted here is that the company added 54 new clients, with the biggest contract being a $1.2-billion full-services deal with The Nielsen Company. There is quite a good chance that global economic slowdown will create cost-control pressures that will see more work outsourced to India. As an investor, you can take advantage of that.

Infosys Technologies-

Widely been regarded as India's hottest software company, Infosys lost 30 per cent of its market cap last year, partly on fears of margins thinning due to the appreciation of the rupee. In the initial part of this year, Infosys saw an increase in buying interest as the market felt this stock has been oversold and has bottomed out at around Rs 1,400.

The rupee appreciation does not able to hinder Infosys from growing at a healthy clip. For example, in the December-2007 quarter, sales increase around 16 per cent and net profits 24 per cent. More importantly, Infosys added 47 new clients and 11,683 employees during the same period. This is a must buy stock for long-term investors.

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Infosys may be on an acquisition spree soon

Innovating the Route to Growth - Infosys Technologies

The appreciation of the rupee versus the US dollar, upswing in wages and likely recession in the US have not boded well for IT shares. The Sensex seesaw last month had investors across the country on tenterhooks. It seems that people with investments in outsourcing companies may be able to sleep better at night (no more damage to sea cables please!!!), after a recent industry report said that India’s outsourcing industry would experience a boom over the next four years. The study (Roadmap 2012 - capitalising on the expanding BPO landscape) was conducted by the National Association of Software and Service Companies (Nasscom), the premier trade body for India’s IT-BPO industry, and global strategy firm Everest Group. The report said that the country’s revenue from back-office outsourcing is likely to grow nearly fivefold to $50 billion by 2012, from the current $11 billion. Indian IT bellwether, Infosys Technologies Limited, is in a sound position to capitalize on this opportunity.

Reuters quoted CEO S. Gopalakrishnan as saying last week that the company is “cautiously optimistic” about the industry's growth, despite the concerns surrounding the US economy. Gopalakrishnan said at the World Economic Forum in Switzerland, “We are looking at stable prices with slight upward movement.”

Earlier this month, the Bangalore-based company reported its net profit after tax at Rs1,231 crore for the fiscal third quarter ended December 31, representing more than 25% YoY growth. Earnings per share was up 22% to Rs21.54. Infosys expects income in the quarter ending March 31 to range between Rs4,477 crore and Rs4,501 crore. For the fiscal year, India’s second largest IT company has projected its income at between Rs16,627 crore and Rs16,651 crore, representing almost 20% growth.

What could go wrong? The Indian outsourcing industry does feel the pressure of a declining US economy. However, Infosys did add 47 clients in the latest quarter, despite the US slowdown. Its bigger rival, Wipro did not do too badly on that front either. Then there is the issue of the shortage of skilled labour. A report from London-based HR firm ECA International earlier this week predicted a 14% jump in average wages at Indian multinationals this year. According to Nasscom President Som Mittal, India still has “a fairly large cost advantage,” despite wage inflation. “I think we are still ahead of the curve,” Mittal added. Forbes also quoted Gopalakrishnan as saying in an interview that India’s technology professionals are growing at around 25% per annum.

One of the overseas market’s ten best performing funds, Oppenheimer Funds Inc, has recently raised its holding of Infosys by more than 150%. That is quite something! Early last month, analyst Harmendra Gandhi of Lehman Brothers had upgraded the rating for Infosys from equal weight to overweight and had upped the 12-month price target from Rs1,793 to Rs2,132. In the note to clients, Gandhi had expressed optimism regarding the company’s revenue and earnings momentum over the next few quarters.

With significant cash in its pocket, we could surely see Infosys make some small acquisitions. Bigger ones are unlikely in the current uncertain environment. The company has delivered solid return on equity and seems in a strong position to continue doing so.

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Stock of the week: Infosys Technologies Limited

By Sundaramurthy Vadivelu

Disclosure

Introduction:

Infosys Technologies Limited is one of India’s largest IT companies. It has presence in nearly every division of IT services industry. It is more popular to among Indian investors for its “bonus” shares. Probably no other Indian company has issued as many bonus shares as Infosys. After the dot.com boom many IT companies witnessed fall in their stock prices. Infosys too, was affected badly between 2000 and 2001. But unlike other companies it has managed to bounce back and even go past beyond its previous high prices.

Infosys campus

Let us now analyze India’s No.2 IT company from a financial and stock market point of view.

Brief History:

Infosys was founded by N.R. Narayana Murthy, Nandan Nilekani and five others at Pune in 1981. It is said that Narayana Murthy borrowed Rs.10,000/- from his wife to start the company. In 1983 Infosys had moved to Bangalore. By 1998, it was about to become bankrupt but Naryana Murthy had faith in his vision. In the 90’s Infosys went public and the money started pouring in. Today, its revenues have crossed USD 3 billion and market capitalization is about USD 30 billion. There are more than 75,000 employees world wide.

Narayana Murthy is currently the Chairman and Mentor of the board and Nandan Nilekani is the Co-Chairman of the board of directors.

Business Profile:

Infosys and its subsidiaries provide end-to-end business solutions that leverage technology. The company provides solutions that span the entire software life cycle encompassing consulting, design, development, software re-engineering, maintenance, systems integration, package evaluation and implementation and infrastructure management services. Apart from this, the company offers software products for the banking industry (Finacle) and business process outsourcing/management services.

Some of the industries that are served by Infosys are given below:

• Aerospace and Defense

• Banking / Capital markets

• Communication Services

• Education

• Healthcare

• Hospitality and Leisure

• Insurance

• Media / Entertainment

• Retail

• Transportation

Infosys has developed Finacle, a system that interconnects several banking requirements from a single platform. This modular solution addresses the core banking, treasury, wealth management, consumer and corporate e-banking, mobile banking and web based cash management requirements of retail, corporate and universal banks worldwide.

In 2001 Infosys was rated "Best Employer in India" by Business Today and in 2002 Business World named it "India's Most Respected Company".

Stock market performance:

Infosys is a constituent of BSE Sensex (Free float market capitalization: Rs.90,068 crores and weightage : 8.97%) and Nifty (FFMC : Rs.112,860 crores and weightage : 4.78%). It is also listed at NASDAQ (Symbol : INFY).

Infosys had come out with an IPO in 1993 at an offer price of Rs.95. It was listed at a premium of Rs.50. It may be noted that IT was not the hottest sector in those days. Infosys has issued bonus shares on five occasions after listing (once 3:1 and rest 2:1). Its face value was split once, from Rs.10 to Rs.5.

According to the data available at the NSE web site, after adjusting for stock split and bonuses, it closed at Rs.7.03 on November 3, 1994. On August 31, 2007 it closed at 1855. Its highest ever close though, was 2383 on February 15, 2007. This means that the stock had gained 339 times in 13 years.

http://groups.google.com/group/theindiastreet/web/INFOSYS_S_P_030907.jpg

Infosys has performed very well in the last 5 years. The sales turnover has gone up by 3.6 times while net profit has gone up by 3.9 times.

The following chart indicates EPS and book value for the corresponding period. Please note that 3:1 bonus was issued in 2004; this was followed by another 2:1 bonus issue in 2006.

http://groups.google.com/group/theindiastreet/web/INFOSYS_EPS_BV_030907.jpg

The monthly chart of INFY at NASDAQ is shown below. It can be seen that the ADR is making higher highs and higher lows; so it is still bullish on long term charts. However, it did not close above the 61.8% retracement level (a key resistance) at 60.78. Once this level is breached, it can possibly test its all time high at 93.75; but for that it has to nearly double from its current close at 47.71.

Data Source: Google Finance (http://finance.google.com)

http://groups.google.com/group/theindiastreet/web/INFY_MONTHLY_030907.jpg

But the Indian investors think differently. Let us see the monthly chart of INFOSYSTCH at NSE shown below.

http://groups.google.com/group/theindiastreet/web/INFOSYSTCH_M_030907.jpg

Infosys has obviously made higher highs and higher lows; it is currently on its 4^th wave. The previous resistance at 1741 should act as a support for the stock. The very fact that it has taken 6 years to break its resistance indicates that the stock is bound for another upmove. Long term investors, may continue to hold this stock.

http://groups.google.com/group/theindiastreet/web/INFOSYSTCH_W_D_030907.jpg

Both weekly and daily charts are displayed above. Infosys continues to make lower highs and lower lows in both medium and short term charts. This is a sign of bearishness. Until the stock turns bullish in daily charts the short term investors should refrain from entering long positions; so is the case for medium term investors till it becomes bullish in weekly charts.

Conclusion:

Infosys has given huge returns (in the form of dividends, bonus shares etc.) to its investors. The same trend is likely to continue. However, the current technical scenario does not favour taking fresh positions; the market is probably concerned about exchange rates, over which the company does not have any control. But the long term investors can remain invested in the stock for some more time.

Sundaramurthy Vadivelu

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