Infosys remains one of the jewels in the crown of Indian software industry. Had any one invested Rs one
lakh in the IPO of the company in year 1993, the amount would have been now Rs 27.6 crore giving a return of almost 70 per cent compounded annual growth rate. Though it will be tough for the company to repeat its past performance on the bourses in future, we believe that it will remain market outperftrmer.
The company which took 23 years to reach its first billion dollar revenue took only 23 months to hit the next billion. The recent acquisition of UK- based company Axon Group Plc, which is into SAP consulting, for USD 753 mn is largest ever acquisition by an Indian software firm. It marks a new trend in the company’s philosophy and it dearly sets in two changes. Firstly, the company no more considers inorganic growth (acquisition) as anathema. Baring few cases, the company had never done acquisition of this scale. Secondly, the companys thrust to move up in value chain, since the low cost providing of technology solution is commoditized.
Sailing through slowdown
According to a report by Gartner, India-bascd IT companies ‘SWITCH’ (Satyam, Wipro, Infosys, TCS, Cognizant and HCL Technologies) have outpaced market growth. They managed to increase their market share in worldwide IT services from 1.9 per cent in 2006 to 2.4 per cent in 2007. We expect this trend to continue and, in spite of the slowdown in the US economy, companies like Infosys will be least affected. This is because Infosys was heavily dependent on North America till year 2003 and drew 73 per cent of revenue, but now only 62 per cent of the revenue comes from America. At the same time, Europe and the rest of world has increased its share to 28 per cent and 9 per cent from 17.7 per cent and 7 per cent, respectively. The best part for the company is that 97 per cent of business is repeat business. This gives good earning visibility for the company.
Valuation
At CMP of Rs 1,759, Infy is discounting its FY08 earning by 21.5 times. This seems to be one of the lowest PE the company is enjoying in the last five years. It has had a median PE of 29x in the last five years. For FY09, Infosys has given EPS guidance of ($2.31- 2.35) Rs 95. Seeing its track record of meeting its revenue and EPS guidance (the company has exceeded or met its guidance consistently except for FY08 and Q4FYO7) and strong management bandwidth, we feel it will achieve its guidance. The EPS of Rs 95 will discount FY09 earnings by 17.9 times. Even if it maintains current PE, it gives appreciation of 20 per cent from current market price. Therefore, we advise our readers to invest in the scrip with long term horizon.
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