March 16 , 2001
Infosys Technologies

BUY
Market price : Rs 4384
Market Cap : Rs263bn
52week H/L : 11250/3741
Average Vol : 6,55,800nos

The Phoenix rises!

Investment rationale

• Albeit having more than 73% revenue exposure to North America, a strong offshore model combined with a derisked business profile, low client concentration and high repeat business will ensure that Infosys will not be hugely affected by the U.S slowdown
            
• Consistent top line growth of more than 20% sequentially over the last 4 quarters, given the size at which it is operating, is commendable. We expect at least a 18% -20% growth to continue over at least the coming two quarters.

• The derisked business model and the continued effort by the company to rise up the value chain gives a high degree of stability and a measure of predictability to the earnings

• Infosys' ability to attract quality manpower is expected to continue. The skew towards the offsite model as well as lower employment opportunities abroad will ensure that the salary expenses and operating costs are well under control.
• Presently the scrip is trading at 46XFY01E earnings. In FY02, the company is expected to grow by around 60%yoy. We see a good upside potential from the current levels and hence we recommend a BUY.

Infosys' network of offshore development centres puts the company in a unique position to take advantage of the U.S slowdown and the increased outsourcing. Infosys has a repeat business of about 84% reflecting the company's level of comfort & strength of relationship with clients and its ability to scale up its operations with its highly trained manpower - both necessary prerequisite for the success of the offshore development model. With 26 clients added last quarter and no change expected in client additions for the quarter to come, the stream of orders and contracts would remain robust.

Infosys has given a sterling performance over the last 4 quarters with qoq growth rates of over 20%. We see this trend repeating for a couple of quarter to come. The success may be partially attributed to the company's ability to derisk its business portfolio. The top 5 clients account for just about 28% of the company’s revenues while the top 10 clients make up around 43% of total revenues. Only 3 clients contribute to more than 5% each of the company’s revenues. The company has always been careful about committing too much of resources to any business area, where it sees only short-term prospects, eg Y2K. This has helped the company to very effectively replace its Y2K business component with revenues from services related to e-commerce. The dot com melt down will also have a very marginal effect on the company given that only 6% of the total revenues is accounted for by dot com companies - again majority of these engagements is involved in building e-commerce infrastructure for Fortune 1000 companies.

Source : India Infoline

The company has always striven to increase its bargaining power with its clients by moving up the value chain. In fact, it is probably the only Indian software services company which takes full project management responsibilities for each of the projects it works on. This has helped the company to maintain / increase its margins by charging the clients better rates which (along with some effect of rupee depreciation) helps the company to more than offset the increase in manpower costs.

The rate hikes have also been helped by the increasing component of e-commerce work being done by the company (28.3% this quarter as compared to around 10% in the same quarter last year). As a result, the operating margins of the company have shot up from 39.5% Q2 FY2000 (38.7% in Q1 FY01) to 40.5% in Q3 FY01. In terms of margin increase, this is undoubtedly the best performance by any large software company.

The derisked business model and the continued effort by the company to rise up the value chain gives a high degree of stability to the earnings. Its dependence on steady business areas also gives a measure of predictability about its earnings. These are the qualities, which endear this company among the investing community. Of course, all this flows from the high quality of management of the company, its strategic vision, the ability of the company to attract and retain the best talent. As a result, Infosys has emerged as a clear leader among companies within the Indian software services sector.

The Infosys stock price has come down significantly along with the general drubbing, which the Indian technology sector has witnessed. This has made the valuations look quite attractive. The stock, at Rs4384, is trading at around 46 times its FY01 expected earnings and 29 times its FY02 expected earnings. This should be seen as an opportunity to buy given the fact that company’s earnings will grow at more than 100% this fiscal and the stock deserves a premium valuation with the kind of unique positioning it has within the universe of IT stocks. At this price we recommend a buy.

Team 5 Paisa

Read our earlier investment idea on Infosys

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