Date: 11th July 2000
Infosys : The final destination for the software devotee
Current market price - Rs8278
BSE Sensex - 4898

Chanting "Narayana, Narayana", millions of faithful have thronged the famous Tirupathi temple in South India, seeking salvation. In the Silicon Valley of India, about six hours away, sits the living God of Indian software sector, who has made Infosys, the final destination for the software devotee. Mr. Narayana Murthy, Chairman of Infosys lives upto the literal translation of his name, and has provided deliverance to his investors. Any investor, who wants freedom from the pains of checking daily stock prices, should simply buy Infosys, and continue with his mundane daily existence without a worry.

What is the Business?
Infosys offers its clients services in the area of software development, maintenance and reengineering services and e-commerce and Internet / Intranet consulting. The company also operates dedicated offshore development centers for some of its clients. It has products like Bancs 2000 and Bankaway, targeted at the domestic banking industry, on which it cannot bank as bulk of revenues (about 93% in FY2000) still comes from exports. Always on the lookout for moving up the value chain, in spite of not having major hits with products, it began offering productized services, such as In2000 (for Y2K), IntERPryzfor ERP and In-Euro for the Euro opportunity and banking services. Infosys focuses on full project management activities rather than subcontracting larger projects or supplying manpower. This translates into bigger bucks on every productive body, a key factor when the company is trying to get out of the manpower multiplication game. Quality is sacrosanct within Infosys and it has SEI Level 5 Certification along with other quality certifications like ISP and TickIT under its belt. Multiple development centers across India in Bangalore, Hyderabad, Pune, Mangalore, Chennai and Bhubhaneswar, and in Toronto and Boston, apart from sales offices in Americas and Europe, makes it a truly global company.

Who is the Management?
The company was promoted by a team of seven experienced software professionals, led by Mr. N R Narayana Murthy. They brought into the company their wide experience, having handled projects in developed countries like USA, Europe and Canada, a skill set which was mutually exclusive and collectively exhaustive. The management, apart from giving the company the right strategic direction, has set high standards of corporate governance along with transparency of operations. In fact, its balance sheets have also become items of emulation. To close the gap with its US counterparts, it was one of the first to adopt US accounting standards. To make sure that FIIs do not miss out on anything, they publish their annual reports in a number of languages, also. When they erred in parking surplus funds in stock markets and burnt their fingers, they admitted their errors and publicly announced that they will not flirt with danger but focus only on core business of software services. The company also has a very high quality of employees due to its proactive personnel policies, be it ESOPs or conducive work environment.

Whither Cash flows?
Infosys has the incredible ability to convert software into hard cash. Cash flow from operations keeps on growing, with PAT growing at over 92% over last five years. Comfortable after NASDAQ offering, they are sitting pretty on a war chest of both cash and stock equity that can be used to fund acquisitions. In spite of spending Rs1.5bn in asset build up to house more people (more bodies implies more monies), they were able to generate cash of Rs0.8bn. The company is unlikely to make any cash calls in foreseeable future.

Why should I Buy?
Infosys is India's top-ranked software company. The undisputed leader in terms of the quality of its people, its technology prowess, and its client list. It trades at a significant premium to its listed peers (200 plus times FY2000 EPS) and so multiple expansion from current levels appears unlikely. High FII holding precludes incremental buying, so any sharp upsurge is unlikely. Any kicker on this front will come if and when the company announces any acquisition. EPS growth will continue at high levels, as demand for software services is unlikely to collapse. This will ensure that your grandchildren will have a soft life.

Where can I go Wrong?
Life post Narayana will be difficult for his successor. It always is when gods depart, although the person stepping in is also an avatar. Already rumblings of dissent are audible. Will the team without the leader be able to manage growth or integration post any acquisition? The problem of surplus cash continues, especially when cash flow from operations is robust. Are they entering stock markets through a backdoor by investing in start ups? The Yantra that did not work ought to have taught them. The moot point remains whether the market is expecting miracles and priced the stock accordingly, so if the company fails to announce its customary earnings surprise, will the bottom fall out?

Abhijeet Dey

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