INFOSYS LTD: GETTING IT's MOJO BACK !!!

Scrip Code: 500209 / INFY/ NYSE:INFY  

CMP:  Rs. 1175.55; Market Cap: Rs. 2,70,017.32 Cr; 52 Week High/Low: Rs. 1,219.80 / Rs. 932.65

Total Shares: 229,69,44,664 shares; Promoters : 30,04,31,272 shares – 13.08 %; Total Public holding : 199,65,13,392 shares – 86.92 %; Book Value: Rs. 220.89; Face Value: Rs. 5.00; EPS: Rs. 55.62; Dividend: 1190.00 %; P/E: 21.13 times; Ind. P/E: 20.84; EV/EBITDA: 13.25x; Total Debt: NIL; Enterprise Value: Rs. 239,650.32 Cr.

INFOSYS LIMITED: The Company was founded on July 2, 1981 and is headquartered in Bengaluru, India. It was first incorporated as Infosys Consultants Pvt ltd and changed its name to Infosys Technologies Ltd on June 2, 1992 and in June 16, 2011 the company changed its name to Infosys ltd. It is a global leader company in the "next Generation" of IT and consulting Services & is recognized for its world-class management practices and work ethics. Infosys Limited, formerly known as Infosys Technologies Limited is a global technology Services Company headquartered in Bangalore, India. It is the second largest IT exporter in India. Infosys Limited is engaged in consulting, technology, outsourcing and next-generation services. The Company's solutions include application development and maintenance, independent validation services, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; Management Consulting, enterprise solutions and package implementation, systems integration and business intelligence; Products, business platforms and solutions, and technologies, such as cloud computing, enterprise mobility, digital, big data and analytics. Its segments are Financial Services and Insurance, Manufacturing, Energy and utilities, Communication and Services, Retail, Consumer packaged goods and Logistics, Life Sciences and Healthcare, and Growth Markets. The company came with an IPO in 1993 with 19,76,100 equity shares of Rs. 10 each priced at Rs. 95 per share and got listed at Rs. 145 per share. The company has very vast and fantastic bonus history, Infosys gave its first bonus on June 30 1994 in ratio of 1:1 and then on in 1997 in ratio of 1:1, 1999 in ratio of 1:1, in 2004 in ratio 3:1, in 2006 in ratio of 1:1, in 2014 in ratio 1:1, and lastly on April 24, 2015 in ratio of 1:1. Infosys has last split the face value of its shares from Rs. 10 to Rs. 5 in 1999. Infosys is the first Indian company to get a US Listing and emerged as one of the most precious companies listed on Nasdaq in terms of market capitalisation in software consulting and services category. It listed its ADR on March 11, 1999 on Nasdaq with the offer of 20,70,000 American Depository Shares which was equivalent to 10,35,000 equity shares of face value of Rs. 10 each at that time at US$34 per ADS. It raised US$7.038 Cr in 1999 through ADS. In December 2002 Infosys transferred the listing of its ADS from NASDAQ to the NYSE. Today, Infosys is a global leader in consulting, technology, and outsourcing solutions. As a proven partner focused on building tomorrow's enterprise, Infosys enables clients in more than 50 countries to outperform the competition and stay ahead of the innovation curve. With US$ 9.2 billion in annual revenues and 193,000+ employees, it provides enterprises with strategic insights on what lies ahead. It help enterprises transform and thrive in a changing world through strategic consulting, operational leadership, and the co-creation of breakthrough solutions, including those in mobility, sustainability, big data, and cloud computing. Finacle is a core banking product developed by Infosys, which is a universal banking solution with various modules for retail and corporate banking. INFOSYS Ltd is locally compared to HCL Technologies, Wipro Ltd, TCS, Hexaware technologies Ltd, and globally with Microsoft Corporation of USA, International Business Machines Corporations of USA, Oracle Corporation of USA, Cap Gemini of Europe, Cognizant Technologies Lt of India, Hewlett-Packard (HP) of USA, Accenture Plc of Ireland, Oracle Corporation of USA, SAP SE of Germany, Fujitsu Ltd of Japan.

Investment Rationale:

Incorporated in 1992, Infosys is the second largest IT company in India, employing over 1,93,000 professionals. The company services more than 1045 clients across various verticals, such as financial services, manufacturing, telecom, retail and healthcare. Infosys has the widest portfolio of service offerings amongst Indian IT Companies, spanning across the entire IT service value chain - from traditional Application Development and Maintenance to Consulting and Package Implementation to Products and Platforms. Infosys is the pioneer in the Global Delivery Model (GDM), which emerged as a disruptive force in the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk. The Company also offers span business & technology consulting, services, systems, product engineering, custom software development, maintenance, re-engineering, independent testing & validation services, IT infrastructure services & BPO. India is the world's largest sourcing destination for the Information Technology (IT) industry, accounting for approximately 67 % of the US$ 124-130 billion market. The industry employs about 1 Cr work-forces. More importantly, the industry has led the economic transformation of the country and altered the perception of India in the global economy. India enjoys cost competitiveness in providing IT services, which is approximately 3 to 4 times cheaper than the US, and this continues to be the mainstay of its Unique Selling Proposition (USP) in the global Sourcing market. India is also gaining prominence in terms of intellectual capital with several global IT firms setting up their innovation centres in India. The IT-BPM sector in India grew at a Compound Annual Growth rate (CAGR) of 15 % over 2010-15, which is 3-4 times higher than the global IT-BPM spend, and is estimated to expand at a CAGR of 9.5 % to US$ 300 billion by 2020. India is the fourth largest base for new businesses in the world and home to over 3,100 tech start-ups, and is all set to increase its base to 11,500 tech start-ups by 2020. India is the topmost offshoring destination for IT companies across the world. Having proven its capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies now offer an entire new gamut of opportunities for top IT firms in India. Social, mobility, analytics and cloud (SMAC) are collectively expected to offer a US$ 1 trillion opportunity and Cloud represents the largest opportunity under SMAC, increasing at a CAGR of approximately 30 % to around US$ 650-700 billion by 2020. With thrust on automation to combat aggressive pricing in the “old”, and all-out approach to win in the “new”, INFOSYS is doing all it takes to return to growth leadership. It is on track to meet the same in calendar year 2016. Among the biggest changes INFOSYS underwent in its transformation endeavor is the appointment of an outsider as the first non-founder CEO – Dr. Vishal Sikka. The move for outsider as the new CEO was in essence, to gear INFOSYS up for the changing demand dynamics and to ensure that its offerings do not lose relevance in the new world. Nearly 18 months since the change at the top, the strategic direction announced by the company, and the progress thus far makes it evident that the company is doing all it takes to win in the Digital era. INFOSYS has clearly upped the ante on acquisitions, and while it has entered into three transactions on that front, it anticipates that inorganic foray will likely to add up and contribute around USD 1.5 billion to the top-line in next five years’ time. INFOSYS has launched Infosys Information Platform (IIP), which leverages the power of open source to address big data adoption challenges such as inadequate accessibility of easy-to-use development tools; fragmented approach to building data pipelines; and lack of an enterprise-ready version of open source big data analytics. Such new initiatives in the company are targeted to contribute around USD 2 billion in five years’ time. 

Under the new CEO, INFOSYS has forged alliances with the likes of Hitachi Data Systems, Huawei, Tableau software, and extended relationships with Microsoft and Amazon in order to facilitate adoption of new technologies across its clientele. INFOSYS has set aside USD 50 Cr for investments in startups, including USD 25 Cr for India-based start-ups, and the company is also looking at partaking in every new innovation that can possibly go on to improve the company’s prospects. Its investments in Whoop and CloudEndure a startup that provides Cloud Migration and Cloudbased Disaster Recovery (DR) software are a couple of examples of the same, its recent acquisition of Noah Consulting, LLC, which is a leading provider of advanced information management consulting services for the oil and gas industry. Infosys has also invested in WHOOP, an early stage company that offers a performance optimization system for elite professional sports teams. Infosys has also and is working for great projects across the globe such as the power engineering major ALSTOM selected Infosys for next-generation services in application engineering, development and maintenance, in addition to product lifecycle management to reduce IT costs, improve user experience, and increase the efficiency of the product design process. The MRJ90, the flagship aircraft of the Mitsubishi Aircraft Corporation, Japan (MITAC) recently completed its maiden test flight and Infosys helped MITAC in the mechanical design of fuselage structures, delivered continuous improvements through automation, and reduced both the cost and cycle time. Mercedes Benz Research and Development Centre, India, has partnered with Infosys to run their complete data-centre and network operations support in 15 countries across the APAC region, increasing agility and automation and reducing cost of operations. DNB Bank of Norway selected Infosys to transform their application landscape. Applying AiKiDo, the company will leverage knowledge-based non-disruptive renewal to evolve DNB Bank’s entire Data cluster, data warehousing services, regulatory reporting, and ERP functions. Commerzbank also choose Infosys for a multi-year application management program to develop a post trade utility for the bank, leveraging principles of Design Thinking and the AiKiDo framework to simplify application architecture, standardize and improve processes, and drive cost efficiency. Since taking over as CEO of Infosys in August 2014, Dr. Vishal Sikka, who was earlier on the executive board of SAP AGs, first rolled out initiative named Design Thinking workshops at many of the company’s facilities across the country. According to the management, over 70,000 of its employees have undertaken a day-long class in Design Thinking, first popularized by IDEO, a California-based consulting firm. Later, Infosys rolled out Zero Distance initiative, because it wanted its engineers to apply the learnings of Design Thinking in each of the projects. Infosys Ltd believes Zero Distance, the newest initiative which is aimed to make its engineers think imaginatively, is an extension of the user-centric process of Design Thinking to help the firm have a tangible and valuable impact for its clients, as the company aims to become a $20 billion next-generation services software firm by the year 2020. The Infosys management believes that the Zero Distance is a very specific application of Design Thinking principles as it outlines for thousands of project managers a five-point roadmap to “jump-start innovation” within their project. Zero Distance initiative will help Infosys’s clients save more than $1 billion a year. This is the first time chief executive Dr. Sikka has put a number to measure the success of the approach introduced in March last year. Under the Zero Distance initiative - the software engineers have either come up with a more efficient way to complete a project or have gone beyond the scope of work to offer new solutions in over 90 % of the 8,500 master projects currently underway. Zero Distance along with the user-centric approach of Design Thinking would emerge as two of the most successful initiatives of Dr. Sikka. Design Thinking has helped the company more than double its share of large deal wins from less than $400 million in a quarter to $900 million in a quarter. Design Thinking is a framework, or a scaffolding, for creativity and innovation. It emphasizes empathetic ‘problem finding’ and iterative ‘problem solving’. It works well in an environment of ambiguity, but great opportunity such as all digital transformation initiatives. These initiatives are helping to bring about a cultural change in the way the 35-year-old firm has traditionally done business. These initiatives have even succeeded at major accounts where cost savings and more efficient approaches been recorded, and even business model innovations are being presented to clients that in the past would have been ignored. Looking the acquisition coupled with the large and variety of projects Infosys surely has the upper hand in the industry and has all the factors that can drive growth in the IT sector.

 Outlook and Valuation:   

Infosys was a pioneer in developing the global delivery model, which provided it with a formidable competitive advantage when offshore outsourcing gained momentum in the early 1990’s and later became an integral part of the IT services industry. The company proactively invested, and continues to invest a significant portion of its resources in developing and improving high-quality processes and methodologies. This not only helps Infosys to streamline its operations and deliver quality services to clients, but also makes it easier for the company to scale its operations when demand picks up, without compromising cost and quality. The company extended this commitment to pursue high-quality standards to other aspects of its business, including physical and technological infrastructure, human resource management, financial accounting, and corporate-governance practices. These actions helped Infosys differentiate itself from its peers. As with other offshore IT service providers, Infosys' foundation was built around its legacy application development and maintenance business. Though the business still accounts a significant portion of the company's revenue, its overall contribution has declined, as Infosys expanded its offerings and moved up the IT services value chain. The company's comprehensive portfolio includes products and services that span the IT services spectrum, starting from high-end consulting and moving on to package implementation and even low-end business process outsourcing. These new service offerings provide Infosys with new growth avenues and enable it to expand its penetration with existing clients. The company's ability to offer end-to-end service offerings, coupled with its fully developed global delivery model, puts it in an elite league of service provider’s like Accenture, IBM, and Cap Gemini that can offer a complete set of integrated services. Infosys boasts a large and have expansive base of more than 1045 active customers. The company has developed strong working relationships with top management at these companies, and most of its clients have been with Infosys for a long time. A large portion of new business is generated through existing relationships in the IT services industry, and Infosys' larger client base gives it a slight edge. Further, an established client base provides good visibility on revenue streams & repeat business, which accounts for more than 98 % of Infosys' revenue. Infosys’s strategy ‘renew and new’ have started shows its results. Its renewing delivery method of existing services and also building new services of the future resonated with the changing landscape of technology demand have started bearing fruits. Several senior personnel from SAP have been recruited to facilitate this. Successful execution of the strategy will help Infosys to regain its bellwether status with industry-leading growth at strong profitability. Infosys’s cost structures have stabilized, allowing it to balance investments and profitability without having significant volatility on the margins. There remains room to improve utilization, and INFO is trying to breach perceived theoretical maximum through its zero-bench initiative. Utilization, optimizing onsite employee cost as a percentage of the revenue and benefits from new initiatives like automation should all help cushion pressures from pricing in the legacy business. Infosys highlighted that it is retaining the benefits of automation and not fully passing it on to clients. It stated that automation will get commoditised in a few years and Infosys is going to have an early-mover advantage in this space, but there will be a higher pass-through to clients in later years. Automation has been highlighted as the largest productivity improvement lever in the medium-to-long term. The focus is now to shift the company from basic level of automation to more cognitive automation that can handle more complex tasks.

There are number of initiatives that were kick-started by Vishal Sikka. It highlighted that it has improved the number of engagements with its platforms including Infosys Information Platform - IIP with more than 200 engagements, Infosys Automation Platform – IAP with 121 engagements, Panaya, and Skava. All these innovations resulted in significant savings in efforts for the company which helped it to free 1,100 odd people in 3QFY16 on top of 800 done in 2QFY16. Infosys reported net employee addition of 5,400 during the quarter. The company stated that more than 69,000 of its employees have undergone training in Design Thinking, which is helping it to develop good innovative solutions and has changed the nature of conversation with clients. The Employee attrition rate declined from 19.9 % in the previous quarter to 18.1 % in 3QFY16. The quarterly annualised attrition rate declined from 14.1 % to 13.4 % sequentially. This is the lowest level of attrition which the company witnessed in the past 15 quarters. The rise in visa costs could potentially hit the company’s margins by 0.30 % to 0.35 % in FY17E based on the current assessment of Infosys. The management stated that revenue growth surpassed its own estimate on account of lower-than-expected furloughs and mitigation of certain client-specific problems. It also indicated no financial impact from Chennai floods. Following a good quarter, Infosys revised upwards its CC revenue growth guidance for FY16 from 10.0 % to 12.0 % earlier to 12.8 %to 13.2 %, while USD guidance was upped from 7.2 % to 9.2 % to 8.9 % to 9.3 %. The company maintained its margin guidance band of 24 % to 26 % for FY16. Infosys reported EBIT margin of 24.9% for 3QFY16 versus 25.5% in 2QFY16, leading to margin contraction by 60bps. Infosys indicated that it was well positioned to achieve industry-leading growth in FY17, a goal it had set for itself about two years ago. The management also highlighted that IT services budgets in CY16 will remain flat to marginally down. There will also be a downward revision in Energy vertical. Players with the right mix of offerings – Automation and Innovative Solutions - will continue to grow, despite flat budgets. The company also maintained its 2020 target of a 30 % margin on the back of increased adoption of automation capabilities. After Vishal Sikka came in as CEO, Infosys became more focused on customers with introduction of new initiative, making senior consultants responsible for selling the entire stack of services to their allocated clients, re-engineering Request For Proposal or RFP response process, etc and on delivery that is bringing in more automation to services like IMS and BPO – fast growing service lines for the industry where Infosys lost market share over the years, getting grassroots innovation going through suggestions from project-level employees, etc. Thus, it is very likely that Infosys will gain market share and grow above industry. The industry itself is unlikely to grow at more than a high single-digit rate over FY16E-FY18E. The Net Sales and PAT of the company are expected to grow at a CAGR of 15 % and 12 % over 2014 to 2017E respectively. At the current market price of Rs. 1175.55, the stock is trading at PE of 20.06 x FY16E and 17.97x the FY17E. Earnings per share (EPS) of the company for FY16E could be seen at Rs. 58.59 and Rs. 65.39 for FY17E. It is expected that shares of INFOSYS to hit all time high soon and the company will keep its growth story intact in the coming quarters also and can be a good pick from this IT sector. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	53,319.00	61,948.90	70,612.10	80,113.80
NET PROFIT (₹ Cr)	12,329.00	13,305.40	15,582.50	17,637.00
EPS (₹)	53.90	58.20	68.10	77.10
PE (x)	21.00	19.50	16.60	14.70
P/BV (x)	4.70	4.20	3.80	3.40
EV/EBITDA (x)	15.40	13.30	11.30	9.70
ROE (%)	24.10	22.90	24.00	24.10
ROCE (%)	24.00	22.90	24.00	24.10

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