Electronic City, Hosur Road,Â
Bangalore 561 229
Tel: 080-852 0261
Fax: 080-852 0362
Website: www.inf.comÂ / www.infy.comÂ
Listed At: Bombay Stock Exchange, National Stock Exchange, Bangalore Stock Exchange, Nasdaq
Face Value: Rs 5 per share
BSE Code: 209
NSE Code: INFOSYSTCH
Nasdaq Code: INFY
52 week High-Low: Rs 13,813/2,700
A few weeks ago, when software stocks were beaten Â down,
sustaining the 50-60% growth in profits of these Indian software companies was
questioned. Now, as the stocks make a comeback, the credibility of the software
sector is on the mend.
Stock markets are fickle, with changes in the share prices
based on factors including demand and supply of shares, political and economic
situations and even rumours. Unfortunately, because of the vast power of
regulation on capital flows into corporates, the valuation given to a company at
any point of time is taken to finally determine its prospects. About four years
ago, when the markets were yet to discover the magic of software, stocks like
Infosys and NIIT were quoting at 10-15 times their prospective earnings. Then,
the stock market boom came and the companies were being valued at 40-50 times
their earnings. Nothing had changed fundamentally in these companies, only that
the market had just discovered them.
Indian software companies never had it better, thanks to the
huge demand for e-business transformation across Europe and the US. Further,
with their increased presence and proven track records, Indian companies are now
competing not on price alone but also due to their technical superiority and
focus on quality.
Background: Super achiever
Set up by a team of seven IT professionals, Infosys now has
over 6,445 software professionals. Headed by Nandan Nilekeni, it has development
centers at Bangalore, Mangalore, Bhubaneshwar, Chennai, Pune, Hyderabad, Mysore
and Canada. Infosys posted sales of Rs 882 crore in 1996-97 with profit after
tax of Rs 504 crores. With an equity base of Rs 33 crore, this works out to an
EPS of Rs 43. Infosys’ management is considered to be one of the best among
The company came out with a public issue in February 1993,
which despite its premium of Rs 85 per share, was fully subscribed.
Subsequently, in October 1994, the company issued shares to FIIs, mutual funds
and financial institutions. Currently, the promoters hold 29% of the shares with
individuals holding 26%, FIIs holding 25%, mutual funds holding 13% and the
balance being held by the public.
offers software and consultancy services in insurance, finance and banking (IFB),
manufacturing, telecom and retailing segments. The company is headquartered in
Bangalore with development centers spread across the country and earns majority
of its revenues from exports. For the fiscal ended March 2000, the company had a
turnover of Rs 882 crore, which was 73% higher than fiscal ended March 1999.
Revenues from the IFB segment made up 30% of the total turnover, compared to 23%
the previous fiscal. Revenues from manufacturing stood at 23% of the total
revenues, telecom at 15% and retailing at 11%, whereas other segments accounted
for the balance 21%.
Infosys on a Roll
The company has considerably reduced its dependence on Y2K
projects over the years with revenues from this segment declining from 24% of
the turnover in the first quarter ended March 1999 to less than 1% in the fourth
quarter of March 2000. Similarly, revenues from the Internet arena have jumped
from 5% in the fourth quarter of March 1999 to 19% in the fourth quarter of
March 2000. Infosys has developed a product for the banking sector called
Bancs2000, which generated revenues amounting to 2.6% of the total revenues in
March 2000 compared to 3% in the previous year. BankAway is the Internet version
of its banking product and has seven customers at present. The company recently
launched another product, Finacle, which provides integrated banking solutions.
The performance of the Internet division has further improved
in the first quarter ended June 2000. Internet revenues stood at Rs 356 crore
contributing 29% to the total revenues against 19% in the preceding quarter.
However, the increasing dominance of the Internet segment has led to a
substantial increase in the onsite revenues, as most of the projects demand
onsite presence of the professionals.
Infosys’ massive software development facility has 17
centers spread across the country, with one global development center in
Toronto. The company has centers in Bangalore, Chennai, Mangalore, Pune,
Bhubaneswar, Hyderabad, Mohali and Mysore, with an area spread across 1,201,500
Sq ft. Additionally, the space outside India was about 38,000 Sq ft. Infosys had
a staff strength of 5,389 professionals at the end of March 2000 compared to
3,766 in March 1999. The staff strength has further increased to 6,445 at the
end of the first quarter ended June 2000. Infosys is an ISO 9001 and SEI CMM
Level 5 company.
was the first ever Indian company to be listed on Nasdaq and each ADS,
representing two equity shares, is currently traded at $145. The company has 16
offices in the US, the UK, Germany, Canada, Japan, Belgium, Sweden and
Australia. The company earned 78% of its revenues from North America and 15%
from the European region with the balance coming from the rest of the world.
Revenues from North America are declining with contribution from the European
region increasing in each quarter. In the first quarter ended June 2000,
revenues from Europe increased from less than 16% last year to about 17% whereas
those from North America were down from 78% to 75%.
The company added 32 new clients in the first quarter and is
currently working with more than 222 clients. Some of the company’s new
clients in the e-commerce area are Educationworld.com, Arcot Systems,
Fishround.com, Gateway Computers and Tradeweave.com. In financial services, the
company is working with New York Life International and Delphi Bank. It has also
entered into an e-commerce partnership with National Bank of Abu Dhabi to
provide banking services on the net.
Infosys’ habit of consistently proving critics wrong has
been amazing. Despite growing concerns on the sustainability of its growth, the
company has managed to outperform expectations with the right mix of projects,
employees and realization. The improving realization per employee despite the
massive growth in the number of employees is ample proof of the company’s
ability to create value and its increasing brand equity in the marketplace.
One of the other major factors driving the success of the
company is its ability to adapt to new technologies. The company has
successfully reduced dependence on Y2K and at the same time improved the share
of Internet-related services. Going ahead, e-commerce is expected to be one of
the major revenue generators as indicated by the quarter-to-quarter share of
Internet services in the total revenue. Moreover, the company is on a much
stronger ground and is now targeting Fortune 1000 companies for the Internet
projects. This means a considerably lower risk compared to working with
start-ups. M-commerce is another area that is expected to boost Infosys’
revenues in the coming years.
(All figures in Rs crore)
Year ended March 31
|# Face Value=Rs 5|
Pushing the revenues of the company are its major assets–software
professionals, whose number increased by a massive 1,000-plus in the first
quarter of the current fiscal. The sheer size of the additional staff and the
fact that these were selected out of more than 180,000 applications proves the
company’s ability to grow in size. Infosys remains unperturbed on issues
relating to management of the size of employees and is investing more than Rs
200 crore in improving its infrastructure. The company is creating new software
development centers in Mysore and Mangalore, apart from increasing capacity at
Bhubaneswar and Chennai. An additional facility, which is bigger than 140,000 Sq
ft is proposed to be added at Bangalore.
The decline in attrition rate–from 14% three years back to
9% in 2000–is a result of the recognition of the role of employees in the
company’s operations. Infosys has gone a step ahead by announcing plans to
incubate ideas of its software professionals. The company has made strategic
investments in companies engaged in emerging technologies. During the last year,
Infosys invested $3 million in one of its US-based client, EU Cubed Inc.
Recently, Infosys also invested in US-based CiDRA Corp, a developer of photonic
devices for high-precision wavelength management and control for next generation
While the company has grown at more than 90% organically,
Infosys has been planning acquisitions for a long time. The company has cash
reserves of more than Rs 450 crore, which can be utilized for the acquisitions.
Moreover, the company can also finance the acquisitions by parting a small
portion of its equity. While the acquisitions would result in substantial growth
in the company’s size, its strategy towards providing IT consultancy would
ensure the growth within. The company sees a huge potential in the IT
outsourcing market and increasing spending on IT by corporates around the globe.
Financial performance: Consistent
Infosys’ financial performance over the last few years has
been astounding, to say the least. While the company’s revenues have grown at
a CAGR of 85% in the past three years, net profit has risen at a CAGR of 101%
during the same period. The company reported a turnover and net profit of Rs 882
crore and Rs 286 crore, respectively, in the year ended March 2000, which were
up by 73% and 108%. The OPM improved from 37% in March 1999 to 39% in March
2000. Infosys’ first quarter results have been equally impressive with the
revenues and net profit growing at 108% and 102%, respectively. OPM, however,
declined marginally in the first quarter as revenues from onsite activity
relating to internet projects was higher. Going ahead, we believe that the
company would be able to sustain the OPM reported in March 2000 due to
improvement in realizations. We expect growth of about 80% in the top line in
the next two years with much better bottomline growth following a sharp decline
in the rupee in the past few months.
Investment potential: Safest bet
Infosys’ share, with a par value of Rs 5, is currently traded at Rs 7,749
discounting its projected March 2001 earnings 102 times and March 2002 earnings
58 times. In recent times, the share price has fluctuated in the range of Rs
6,500 and Rs 8,000, following the trend of its ADS listed on Nasdaq. While there
remains no doubt on the management’s ability to sustain growth, we believe
that the movement of the share price would depend on the announcement of
acquisitions that the market has been anxiously expecting. With IT stocks
behaving erratically in the past few months and the old economy stocks failing
to live up to the market expectations, we believe that Infosys is one safe bet
that investors can rely upon. Accumulate.
is the founder of Technology Capital Partners
The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here.