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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Genpact IPO Good Bet Long Term but May have a Shaky Start

Genpact IPO – The India Street Analysis

Introduction:

Genpact Limited, a business process outsourcing company (BPO) based in India plans to raise about USD 700 million through its IPO (initial public offering) at the New York Stock Exchange. The company had filed a registration statement with the Securities and Exchange Commission (similar to SEBI) in US on May 11 this year. The company has proposed a price band of USD 16 – 18 and the issue size is 35.29 million shares. It has requested for the ticker ‘G’ previously used by Gillette a few years ago before it was taken over by Proctor & Gamble. Morgan Stanley, Citi and JPMorgan are the co-lead underwriters.

“Business Process Outsourcing” means relocating entire business functions to either self-owned or third party service providers, typically in low cost locations like India. Two Indian BPO’s have been listed in US so far; WNS Holdings (NYSE) and EXL Service (NASDAQ).

Genpact is registered in the Caribbean island of Bermuda and has operations in China, Hungary, India, Mexico, The Netherlands, Philippines, Romania, Spain, United Kingdom and United States.

The company was formerly known as GE Capital International Services. It was founded in 1997 at Gurgaon, India. General Atlantic and Oak Hill Capital Partners acquired a 62.63% stake in Genpact from General Electric in 2005.

Genpact has 5 sites in India at Gurgaon, Hyderabad, Bengaluru, Jaipur and Kolkata. As of 2007, it has an employee strength of 30,000 globally.

Business Overview:

Genpact serves the following industries: Banking and Finance, Insurance, Manufacturing, Transportation and Automotive.

Banking and Finance:

Genpact has more than 650 associates and 3,500 full time employees serving businesses across USA, Europe, Australia and Asia from its global locations in India, China, USA, Mexico and Hungary. A range of customer end financial products including private label credit cards, dual cards (PLCC with credit card functionality), retail finance, auto finance, personal loans and mortgage are supported. The services include finance and accounting, sales / marketing analytics, customer services and financial services collections / operations.

Insurance:

More than 1,800 employees serve the insurance operations. Life insurance, health insurance, annuities and pensions, mortage insurance, liability insurance and property / casualty insurance are the key areas covered. These services fall into 4 categories viz. insurance policy set up and maintenance, agent support, billing / collections, risk assessment / marketing and IT services.

Manufacturing:

The company serves high end manufacturing industries like power systems, transportation etc. Services include online support, payment collections, procurement assistance and execution, vendor co-ordination, production planning / control and sales / marketing.

Transportation:

Genpact provides customer relationship and trade support, business operations support, finance and accounting, employee services and marketing support to global airlines, travel agencies, logistics service providers, car rental firms etc.

Automotive:

Genpact's service solutions comprise of supporting clients across component and sourcing execution, manufacturing forecasting and planning, financing, after sales and dealer support. It helps its clients gain control over their supply chain costs by providing transactional procurement functions remotely, while also providing inventory management planning through analytical techniques unique to the offshore industry.

Genpact has direct fibre optic connectivity to US, Europe and Australia, thus enabling redundancy for links and equipment. It has more than 500 servers and 10,000 desktops to perform the operations.

The proceeds of the IPO is proposed to be used for repayment of debts outstanding under credit facilities and for working capital and general corporate purposes, including potential acquisitions.

Financial performance in the past:

Description	2004	2005	2006
Income	165.50	187.90	252.20
Expenditure	83.60	171.00	209.00
Net income	81.90	16.90	43.20
Profit before tax	90.20	10.70	33.90
Income tax	6.70	-6.40	-5.90
Net profit	83.40	17.10	39.80

1. All figures are in million USD.

2. The financial year is considered as January – December.

3. It is to be noted that the general, selling and administrative expenses for 2004, 2005 and 2006 were 76.3, 117.5, 159.2 million USD, the main reason for drop in net profits.

Indian companies listed at NYSE:

11 Indian companies are listed at NYSE, out of which 9 are constituents of Nifty. Patni computer systems is a constituent of Nifty Junior index. The full list is as follows: Dr.Reddy’s Laboratories, HDFC Bank, ICICI Bank, MTNL, Patni Computer Systems, Satyam Computer Services, Sterlite Industries, Tata Motors, VSNL, Wipro and WNS Holdings.

WNS Holdings got listed on July 26, 2006. EXL Service got listed at NASDAQ on October 20, 2006. Let us analyze the daily charts of these two stocks, since these are Indian BPO companies listed in US.

We can see the “double top” formation in both the charts between mid November 2006 and mid February 2007. This is a bearish sign. As a result, both the stocks had almost fallen back to their opening price on listing, which is a key support level. In both cases watch the “upward gap” or the “rising window” nearly a month after listing; a “downward gap” or “falling window” just after the first peak in case of EXLS and after the second peak in case of WNS. These indicate nearly identical demand supply gap scenario for both the stocks. EXLS is still bearish; WNS has just begun an upmove and currently in second wave.

EXL Service

http://groups.google.com/group/theindiastreet/web/EXLS.JPG

WNS Holdings

http://groups.google.com/group/theindiastreet/web/WNS.JPG

Charts courtesy: Yahoo! Finance

Conclusion:

As of now, the IPO details are being scrutinized by the SEC. Given the technical scenario of both EXLS and WNS, Genpact may be a shaky starter at NYSE. Another factor to be considered is the exchange rate. An appreciating Indian Rupee, for example, may fetch lower revenues in Indian currency; but the local expenditures, overheads and other expenses may have to be met in local currency. This gives a distinct disadvantage. However, going by the fundamentals, business model, infrastructure, personnel and support services, Genpact is likely to perform well in the long term.

SUNDARAMURTHY VADIVELU

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