Recommendation: HOLD (BUY on dips)
Sector: IT/Software Service Provider
Home Country: India
Listed On: Bombay Stock Exchange/NASDAQ (ADR)
Data provided are Consolidated US GAAP figures in US$ for the ADR:
Expected Total Revenue for fiscal year ending March 31st 2006: 2.2 bln US$
Expected Net Income for fiscal year ending March 31st 2006: 578 mln US$
Debt/Equity Ratio Dec. 2005: 0.16
Share Price (ADR) April 4th 2006: 78.22 US$
Expected Earnings per share fiscal years ending march:
2006: 2.05 US$
2007: 2.56 US$
2008 : 3.20 US$
2009 : 4.0 US$
Expected Price/Earnings Ratio: (for actual share price with expected EPS)
2006: 38
2007: 30
2008: 24
2009: 19
Target P/E Ratio 2007: 25
Exchange rate as of April 3rd 2006: 1 US$= 44.425 INR
Target Share Price End 2007: 100 US$
(representing an increase of 28% compared to todays share price)
Company Profile
Infosys Technologies Ltd. (NASDAQ: INFY) provides consulting and IT services to clients globally - as partners to conceptualize and realize technology driven business transformation initiatives. With over 49,000 employees worldwide, Infosys uses a low-risk Global Delivery Model (GDM) to accelerate schedules with a high degree of time and cost predictability.
As one of the pioneers in strategic offshore outsourcing of software services, Infosys has leveraged the global trend of offshore outsourcing.
Infosys provides end-to-end business solutions that leverage technology and provides solutions for a dynamic environment where business and technology strategies converge. The approach focuses on new ways of business combining IT innovation and adoption while also leveraging an organization's current IT assets. Infosys works with large global corporations and new generation technology companies - to build new products or services and to implement prudent business and technology strategies in today's dynamic digital environment.
Analysis
Infosys has been able to grow its revenues and net income at an average rate of more than 30% for the last years, which shows its strong market position, good organisational structure and its competitive advantages. Infosys has a strong capital base with a debt/equity ratio of 0.16 it has further potential to grow. The trend of outsourcing and offshoring continues and Infosys has also taken the strategy of buying smaler consultancies to be closer to its customers. Infosys is one of the most successful IT service companiess from Indias IT industry and the environment is set for further growth.
However, at A1GLOBALINVESTOR.com we believe that it will be difficult for Infosys to continue to grow at above 30% per year. There are several reasons for that. One is that due to the size it already reached, it needs to add much more revenue each year to keep the growth rate constant, the second is that even in India it becomes harder to recruit such a large number of new employees every year and the third reason is that its cost advantage becomes smaler as other IT service companies invest and recruit in India, too. Therefore its margin might come under pressure in the future. Still we see further growth for Infosys, but we put our growth rate estimate at 25% for the coming years and for that rate we assume a constant profit margin. We put our P/E ratio estimate for 2007 at 25 as we consider the consulting business as a growth business and not as a cyclical one. Still we do not want to put a higher than 25 P/E ratio on the company as that is already far higher than the indian average of about 12 and the indian market remains volatile and subject to political instability. However this volatility might offer good buying opportunities once the stock has come down a couple percentage points.
With our EPS estimate of 4.0 US$ for the fiscal year ending March 2009 and our P/E ratio estimate of 25, we arrive at our target share price of 100.00US$ for the end of 2007, as stocks are commonly valued with the expected earnings of the coming year. As our target share price represents only an increase of 28% above the actual share price, we put a HOLD recommendation on the stock.