Infosys Technologies Limited (INFY)
overview of the software market from S&P Industry Report
Over the past decade, the software industry has witnessed a stabilization and maturing of the enterprise software provision market. Leaders such as SAP and Oracle have claimed large sections of the market and will probably continue to hold them in the near future. This market is expected to be characterized by steady, single digit growth in the next few years.
However, there seems to be increasingly high potential for security and business intelligence software. Furthermore, according to Standard and Poor’s, the market for application software and application development is also expected to grow by 2010. Currently, the market trends seem to be in the direction of open-source and on demand software. Because of the ease with which the internet allows for the downloading and installation of software and because of the recent growth of the Linux operating system, internet distribution and open-sourcing of software is becoming increasingly popular.
As the industry expands and becomes more competitive, it is expected that more consolidation of vendors will occur. Thus, the large software providers with established bases are more likely to be able to deeply penetrate existing customers more cheaply and grow. Standard and Poors estimates that the large diversified software vendors are the ones who will reap the most benefits in the coming years.
business overviewfrom Google Finance and Infosys.com
Infosys Technologies Limited is a global technology services firm that provides consulting and IT (Information Technology) services to clients.Among the various sersvices that it provides are consulting, design, development, software re-engineering and maintenance, systems integration, package evaluation, and implementation and infrastructure management services. More importantly, it also provides customized software solutions for clients (both creating and providing new applications and enhancing the functionality of existing software), with each project typically involving all aspects of the software development process, from designing, prototyping, and programming, to module integration and installation of the custom application.
Infosys has over 72,000 employees worldwide and is a pioneer in offshore outsourcing of software services: it operates using a Global Delivery Model (GDM), which allows it to accelerate schedules, improve efficiency, and expand the work day to 24 hours. To facilitate this model, the company subsidiaries in countries around the globe, including Australia, China, India, and North America.
The company is headed by co-founder and C.E.O Kris Gopalakrishnan, who holds a Masters of Science in Physics and a Masters of Technology in Computer Science from the Indian Institute of Technology.
porter’s five forces analysis
I. Threat of New Entrants – There is always a threat of new entrants into the market. Software start-ups were very common in the past decade. However, it seems as if the market today is moving towards consolidation of existing vendors, so it is unlikely that there is a large threat posed by new entrants.
II. Power of Suppliers: Suppliers in this market have very little power. Because there are alternative products and because buyers have so much power, suppliers do not wield much influence in the market.
III. Power of Buyers – The software industry is basically a buyers market—software vendors face intense competition and continuous pricing pressure. It is quite common for buyers to choose to purchase more from just a few vendors (vendor rationalization), which further increases their market power.
IV. Availability of Substitutes – There is quite a large availability of substitutes. Buyers hold a lot of power and it is easy for them to switch to another vendor. At the same time, however, once a software is installed on all of the computers of a certain company, switching at any given moment is difficult, and so established software companies have few substitutes.
V. Competitive Rivalry – Competition is fierce in the market and continues to become even more so. Especially as companies continue to consolidate, a few major giants will emerge as the main competitors in this market.
competition
competitor / company description / EPS / P/E ratio / implications for CHLWIT: Wipro Technologies / Wipro is a global IT services company and is the largest independent provider of Research and Development / 0.49 / 33.68 / Although Wipro has performed well above expectations in the past and continues to do well today, its focus on R&D distinguishes it from Infosys, which offers a variety of consulting, software, and other IT services to its clients, and prevents the two companies from being in direct competition. However, they are still major competitors because they both service the same market.
Satyam Computers / Satyam is an IT solutions provider, providing such services as application development and maintenance, consulting and enterprise business solutions, extended engineering solutions and infrastructure management. / 0.82 / 30.61 / Satyam is in much the same position as Wipro. It is a significant competitor for Infosys.
financials
income statement
Over the past several quarters, Infosys has demonstrated a consistently increasing ability to generate revenues, with substantially lower costs of revenue. Similarly, its gross profit has steadily increased year after year.
In Millions of USD (except for per share items) / 3 months Ending 2007-03-31 / 3 months Ending 2006-12-31 / 3 months Ending 2006-09-30 / 3 months Ending 2006-06-30Revenue / 863.00 / 821.00 / 746.00 / 660.00
Other Revenue, Total / - / - / - / -
Total Revenue / 863.00 / 821.00 / 746.00 / 660.00
Cost of Revenue, Total / 497.00 / 468.00 / 423.00 / 389.00
Gross Profit / 366.00 / 353.00 / 323.00 / 271.00
Selling/General/Admin. Expenses, Total / 128.00 / 118.00 / 111.00 / 101.00
Research & Development / - / - / - / -
Depreciation/Amortization / 1.00 / 1.00 / 1.00 / 0.00
Interest Expense(Income) - Net Operating / - / - / - / -
Unusual Expense (Income) / - / - / - / -
Other Operating Expenses, Total / - / - / - / -
Total Operating Expense / 626.00 / 587.00 / 535.00 / 490.00
Operating Income / 237.00 / 234.00 / 211.00 / 170.00
Interest Income(Expense), Net Non-Operating / 0.00 / - / 0.00 / 1.00
Gain (Loss) on Sale of Assets / - / - / - / -
Other, Net / 28.00 / 13.00 / 14.00 / 28.00
Income Before Tax / 265.00 / 247.00 / 225.00 / 199.00
Income After Tax / 259.00 / 218.00 / 199.00 / 176.00
Minority Interest / 0.00 / 0.00 / 0.00 / -2.00
Equity In Affiliates / - / - / - / -
Net Income Before Extra. Items / 259.00 / 218.00 / 199.00 / 174.00
Accounting Change / - / - / - / -
Discontinued Operations / - / - / - / -
Extraordinary Item / - / - / - / -
Net Income / 259.00 / 218.00 / 199.00 / 174.00
Preferred Dividends / - / - / - / -
Income Available to Common Excl. Extra Items / 259.00 / 218.00 / 199.00 / 174.00
Income Available to Common Incl. Extra Items / 259.00 / 218.00 / 199.00 / 174.00
Basic Weighted Average Shares / - / - / - / -
Basic EPS Excluding Extraordinary Items / - / - / - / -
Basic EPS Including Extraordinary Items / - / - / - / -
Dilution Adjustment / - / - / - / -
Diluted Weighted Average Shares / 569.89 / 566.88 / 564.86 / 562.81
Diluted EPS Excluding Extraordinary Items / 0.45 / 0.38 / 0.35 / 0.31
Diluted EPS Including Extraordinary Items / - / - / - / -
Dividends per Share - Common Stock Primary Issue / - / 0.00 / 0.11 / 0.00
Gross Dividends - Common Stock / - / - / - / -
Net Income after Stock Based Comp. Expense / - / - / - / -
Basic EPS after Stock Based Comp. Expsense / - / - / - / -
Diluted EPS after Stock Based Comp. Expense / - / - / - / -
Depreciation, Supplemental / - / - / - / -
Total Special Items / - / - / - / -
Normalized Income Before Taxes / - / - / - / -
Effect of Special Items on Income Taxes / - / - / - / -
Income Taxes Ex. Impact of Special Items / - / - / - / -
Normalized Income After Taxes / - / - / - / -
Normalized Income Avail to Common / - / - / - / -
Basic Normalized EPS / - / - / - / -
Diluted Normalized EPS / 0.45 / 0.38 / 0.35 / 0.31
balance sheet
Looking at the balance sheet, it is apparent that Infosys has built up and almost doubled its total assets in the past year. In the meantime, liabilities have also gone up, but not by as much. Their total equity has also been on the rise and their operating margins are high. All in all, the company seems to be in a state of excellent health.
In Millions of USD (except for per share items) / As of 2007-03-31 / As of 2006-12-31 / As of 2006-09-30 / As of 2006-06-30Cash & Equivalents / 1,403.00 / 589.00 / 328.00 / 392.00
Short Term Investments / 6.00 / 498.00 / 615.00 / 358.00
Cash and Short Term Investments / 1,409.00 / 1,087.00 / 943.00 / 750.00
Accounts Receivable - Trade, Net / 565.00 / 502.00 / 454.00 / 408.00
Receivables - Other / - / - / - / -
Total Receivables, Net / 639.00 / 574.00 / 528.00 / 465.00
Total Inventory / - / - / - / -
Prepaid Expenses / 50.00 / 64.00 / 49.00 / 51.00
Other Current Assets, Total / 2.00 / 2.00 / 2.00 / 2.00
Total Current Assets / 2,100.00 / 1,727.00 / 1,522.00 / 1,268.00
Property/Plant/Equipment, Total - Gross / - / - / - / -
Goodwill, Net / 128.00 / 106.00 / 91.00 / 91.00
Intangibles, Net / 20.00 / 20.00 / 18.00 / 19.00
Long Term Investments / - / - / - / -
Other Long Term Assets, Total / 87.00 / 55.00 / 49.00 / 64.00
Total Assets / 3,073.00 / 2,517.00 / 2,220.00 / 1,938.00
Accounts Payable / 6.00 / 4.00 / 4.00 / 2.00
Accrued Expenses / 274.00 / 210.00 / 183.00 / 147.00
Notes Payable/Short Term Debt / - / 0.00 / 0.00 / 0.00
CurrentPort. of LT Debt/Capital Leases / - / - / - / -
Other Current liabilities, Total / 77.00 / 81.00 / 71.00 / 57.00
Total Current Liabilities / 357.00 / 295.00 / 258.00 / 206.00
Long Term Debt / - / - / - / -
Capital Lease Obligations / - / - / - / -
Total Long Term Debt / - / 0.00 / 0.00 / 0.00
Total Debt / - / 0.00 / 0.00 / 0.00
Deferred Income Tax / - / - / - / -
Minority Interest / 0.00 / 0.00 / 2.00 / 2.00
Other Liabilities, Total / 1.00 / 1.00 / 5.00 / 5.00
Total Liabilities / 358.00 / 296.00 / 265.00 / 213.00
Redeemable Preferred Stock, Total / - / - / - / -
Preferred Stock - Non Redeemable, Net / 0.00 / - / - / -
Common Stock, Total / 64.00 / 62.00 / 62.00 / 31.00
Additional Paid-In Capital / 692.00 / 512.00 / 477.00 / 444.00
Retained Earnings (Accumulated Deficit) / 1,871.00 / 1,612.00 / 1,465.00 / 1,296.00
Treasury Stock - Common / - / - / - / -
Other Equity, Total / 88.00 / 35.00 / -49.00 / -46.00
Total Equity / 2,715.00 / 2,221.00 / 1,955.00 / 1,725.00
Total Liabilities & Shareholders' Equity / 3,073.00 / 2,517.00 / 2,220.00 / 1,938.00
Shares Outs - Common Stock Primary Issue / - / - / - / -
Total Common Shares Outstanding / 571.21 / 557.85 / 555.78 / 553.69
cash flows
The cash flow statement of Infosys is also quite healthy. The cash from operating and investing activities consistently is higher than the cash they send to other sources.
In Millions of USD (except for per share items) / 3 months Ending 2007-03-31 / 3 months Ending 2006-12-31 / 3 months Ending 2006-09-30 / 3 months Ending 2006-06-30Net Income/Starting Line / 259.00 / 218.00 / 199.00 / 174.00
Depreciation/Depletion / 36.00 / 32.00 / 28.00 / 23.00
Amortization / - / - / - / -
Deferred Taxes / -2.00 / -1.00 / -1.00 / -2.00
Non-Cash Items / 4.00 / 0.00 / 0.00 / 1.00
Changes in Working Capital / -15.00 / -12.00 / 2.00 / -75.00
Cash from Operating Activities / 282.00 / 237.00 / 228.00 / 121.00
Capital Expenditures / -145.00 / -80.00 / -72.00 / -42.00
Other Investing Cash Flow Items, Total / 459.00 / 118.00 / -251.00 / -321.00
Cash from Investing Activities / 314.00 / 38.00 / -323.00 / -363.00
Financing Cash Flow Items / 1.00 / 1.00 / - / -
Total Cash Dividends Paid / 1.00 / -71.00 / -1.00 / -264.00
Issuance (Retirement) of Stock, Net / 184.00 / 30.00 / 30.00 / 33.00
Issuance (Retirement) of Debt, Net / - / - / - / -
Cash from Financing Activities / 186.00 / -40.00 / 31.00 / -231.00
Foreign Exchange Effects / 32.00 / 26.00 / 0.00 / -24.00
Net Change in Cash / 814.00 / 261.00 / -64.00 / -497.00
Cash Interest Paid, Supplemental / - / - / - / -
Cash Taxes Paid, Supplemental / - / - / 12.00 / 25.00
Valuation
Over the last five years, Infosys has demonstrated consistent positive growth. Although during the late 90s, it experienced precipitous growth followed by a fall in share prices in late 2000 and early 2001, this should not be a cause for concern because this pattern of growth is characteristic of companies of the dotcom boom and subsequent burst. What should be noted, however, is that since 2002, Infosys has experienced steady growth, and unlike many other dotcom companies, has almost regained the highs that it experienced during that period of boom. Considering how well it handled the dotcom bubble, it is evident that the company can rebound well, which is a plus for the future.
Infosys / Satyam Computer / Wipro Technologies / IndustryMarket Cap: / 30.53B / 8.25B / N/A / 340.64M
Revenue (ttm): / 3.41B / 1.50B / 1.64B1 / 85.30M
Gross Margin (ttm): / 46.32% / 37.44% / N/A / 74.30%
EBITDA (ttm): / 1.08B / 348.22M / N/A / 8.73M
Oper Margins (ttm): / 27.91% / 20.62% / 18.89% / 4.67%
Net Income (ttm): / 945.88M / 309.91M / 482.69M / 3.18M
EPS (ttm): / 1.66 / 0.82 / 0.49 / 0.11
P/E (ttm): / 32.20 / 30.61 / 33.68 / 37.58
PEG (5 yr expected): / 0.91 / 0.84 / N/A / 1.31
P/S (ttm): / 8.98 / 5.57 / N/A / 2.82
* as of 2006
Infosys’s numbers and ratios are all very strong. Its lower than industry PE ratio is a signal that the company may be undervalued compared to the industry and is thus a good buy. Its high Price to Sales ratio is an indicator of optimistic consumer expectations – that is, investors expect future earnings to continue growing.Its high EBITDA and operating margins indicate its profitability. Its gross margins, although below the industry average, are well above those of its competitors, as are its net income and earnings per share. In general, the figures seem to beat those of the industry, indicating that Infosys is a good buy.
investment opportunities
In general, Infosys offers several great investment opportunities. The industry as a whole is very robust and has been doing well for the past several years. Infosys’s strong and healthy financials mark it as a company with great potential. In this highly competitive market, the large size and brand name of the company are also a plus. Below are several other key areas that highlight its potential.
promising GDM model of delivery
Infosys operates using a Global Distribution Model. It has been one of the pioneers of software outsourcing, and the GDM model allows it to operate around the clock and service clients all around the globe. As the IT market becomes increasingly more global, this operations model will help Infosys expand its market share and earn profits.
deliverance of customized application software
As we increasingly witness a maturing of the enterprise software market and a decrease in its profitability, companies that offer customized software at low prices will be well suited to gaining clients. Infosys has consistently serviced clients, offering unique and customized solutions. Because the enterprise software market has matured, this opens the door for new providers of custom services.
investment risks
increasing power of buyers
Buyers—the clients of software companies—seem to have ever increasing power. As the number of software companies and the variety of products rises, buyers have more to choose from and thus exert greater market power. Software companies have to work increasingly harder to maintain their customers.
diminishing demand for custom software
Given the increasing popularity of enterprise software, firms may find it no longer necessary to purchase custom software from vendors like Infosys. In this case, Infosys will suffer because it does not hold a big enough share of the enterprise software market to be able to compete with enterprise software giants such as SAP and Oracle. However, this risk is not a great one, because the chances of this happening are low. On the contrary, according to Standard and Poors, the trend seems to be towards application and on-demand software.
declining sales of hardware
The sale of software is always dependant on the sale of the underlying computer hardware on which it runs. Thus, economic conditions and cycles that characterize the hardware market also affect the purchases of software. Furthermore, purchases tend to be cyclical as the market relies increasingly on replacement cycles and upgrade demand. All in all, the success of software vendors in any given year is strongly linked to the success of the hardware industry, and software vendors consequently always face the risk of decreasing demand for computer hardware.
investment recommendation
Given its stable financials, its sweeping vision, its plans for expansion, and its effective management, we believe Infosys Technologies Limited will continue to outperform expectations and earn profits.In addition, its Global Delivery Model will allow it to take advantage of the rapid market and deliver products at a more efficient rate, thus increasing its profits. Lastly, the effectiveness of its management has been high time after time according to Reuters; it’s return to assets are 33%, compared to the industry’s 13%. Consequently, we believe that SWS should buy INFY at the market price of $52.77 and set a target price of $56-$58.