Fundamental Analysis of Infosys

INFOSYS INVESTOR REPORT
SAPM
INFOSYS INVESTOR REPORT OF INFOSYS:
Fundamental Analysis
Submitted by-
Gopinath Dhavala(2016PGP132)
Kalla Surya Teja(2016PGP164)
Noolu Satish Chandra Srikanth(2016PGP250)
Rony John(2016PGP319)
Vasantada Srikanth(2016PGP423)
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1. Compelling Story
Infosys is a global technology company with businesses in Information Technology and Business
Consulting. The company is actively changing its business models with disruptions in technology
industry and staying relevant throughout the time. With the new wave of disruptions, the company
is actively growing its business in Cloud Applications and Infrastructure, Mainframe
Modernization to cloud, Cyber security, developing new digital end-user experiences, Advanced
Analytics & Data Science, Engineering Service and IoT etc., Infosys is taking a renewal of their
traditional service model from ‘people only’ delivery model to a ‘people + software’ model where
the software results in a significant improvement. The next gen AI tool, Infosys – Nia is playing a
big role in bringing significant automation led productivity to delivery efficiencies. Nia and
Panaya are expected to drive the future revenues of the company. In fiscal 2017, the company
made six new investments in startup companies working in AI, Autonomous unmanned vehicles,
Data Insights, Cloud and more – all areas relevant to the future and clients requirements
2. Revenue model
The company, the second largest
Indian IT company, derives revenues
primarily from software development
and from licensing of software
products. The billings are either on a
fixed-price and time and materials
(48% of total revenue) or fixed
timeframe (52% of total revenue).
The revenues grew 7.4% this year due

to the increase volumes in its segments.
Financial services (27.1%), Energy and
utilities, communication & services
(22.5%) and Retail, Consumer packaged goods and Logistics (16.4%) are its major segments. The
currency deviations affect the revenues. Had the exchange rate remained constant the revenue
increase would have been 8.3% as against 7.4%. North America leads in revenue share with
61.9%, followed by Europe with 22.5%, and India with 3.2%. Overall segment profitability has
marginally declined primarily on account of decline in realization, compensation increase for
employees, cross currency volatility, increase in onsite mix, increase in impairment loss on
receivables from certain customers, partially offset by increase in utilization, and Rupee
depreciation against U.S. Dollar.
Infosys generate substantial revenues in foreign currencies, particularly the U.S. dollar, the United
Kingdom Pound Sterling, Euro and the Australian dollar, whereas it incurs a significant portion of
the expenses in Indian rupees. The net profit earned from providing software development and
other services outside India is subject to tax in the country where it performs its work. Most of the
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taxes paid in countries other than India, can be claimed as a credit against our tax liability in India.
There is always risks and uncertainties relating to the ability to manage growth and intense
competition in IT services including those factors which may affect its cost advantage.
Any change in the US visa policy could be detrimental to the company as the low cost engineering
resources outside US is a competitive advantage for the company. Infosys has clients in more than
30 countries and we assume the macro-economic, currency exchange rate would be within the
reasonable limits the company hedge for.
3. Profit Model
Infosys has stable EBBIT and PAT

margins over the Years. Current ratio of
Infosys is over 1.5, so the company has
adequate current assets to cover its current
liabilities. The Company does not have any
long term debt. Infosys has Strong
fundamentals such as high profit margins,
low debt levels and Growing dividends.
The company has ROE of around 25%,
which is higher than the WACC calculated
for the Company. So, the company is
generating good returns for the
shareholders invested capital.
4. Valuation
4.1. DCF Valuation
The sales are being grown at a CAGR of

12.5% for the last five years and the total
cost as a percentage of sales are growing at
constant rate. Being a less asset intensive
firm Infosys depreciation and amortization cost is just 2% of total sales and we assumed the same
rate for next few years. For the past 5 years Infosys is not spending much on capital expenditure
we assumed that it will be less for the next few years though it is trying to build new competencies
in the field of AI. Capex growth for the estimation is calculated as average of Capex as a
percentage of sales for the last 5 years.
We have calculated WACC by considering risk free rate as 10 Year G Sec Par Yield from RBI
Website and calculated market risk premium based on NSE 50 returns over last 7 years. The beta
of the firm is taken as slope function of NSE vs NIFTY over last 7years and the beta indicating
less volatility w.r.t the market. The company is still rich in cash so it has almost zero debt; we
calculated cost of debt as the sum of risk-free rate and yield spread on Infosys's credit rating of
AAA. The organization is confident about the growth of IT industry as the adoption rate of digital
payments will be increasing in India so we have taken growth rate as 6% (Similar to GDP) and
calculated terminal value. Our valuation suggesting an implied share price of 1090.33 which is
3
higher than the CMP 989.40.
4.2. Relative Valuations
Along with DCF valuation we have done trading multiples valuation, for this we have considered a
peer group of companies which are similar as Infosys. P/E ratio is 17.18x, EV/Sales is 3.95x and
EV/EBITDA is 12.21% for the industry. By assuming certain weights for the different multiples
we arrived at a fair price of Rs 1111.2.
4.3. Recommendation
DCF analysis, Implied EV/Sales value is 3.4x and EV/EBITDA value is 11.4x with these numbers
we would suggest that the stock price is undervalued and we would recommend to buy Infosys
shares, though it has faced chaos in corporate governance issues with the appointment of new CEO
Salil Parekh the organization may perform better.

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Fundamental Analysis of Infosys

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INFOSYS INVESTOR REPORT

The revenues grew 7.4% this year due

Infosys has stable EBBIT and PAT

4.1. DCF Valuation

The sales are being grown at a CAGR of

4.2. Relative Valuations

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