Infosys (INFY) is a Indian multinational specializing in software services and off shoring. It is a top Indian company with a market cap of 21 billion. In this segment, we will look at the company and its financials. The overview of the company is as follows:
Infosys Technologies Limited (Infosys), along with its majority owned and controlled subsidiary, Progeon Limited (Progeon), and wholly-owned subsidiaries Infosys Technologies (Australia) Pty. Limited (Infosys Australia), Infosys Technologies ( Shanghai)Co. Limited (Infosys China) and Infosys Consulting Inc. (Infosys Consulting) is a leading global technology services firm. The company provides end-to-end business solutions that leverage technology thus enabling its clients to enhance business performance. The company provides solutions that span the entire software life cycle encompassing consulting, design, development, software re-engineering, maintenance, systems integration, package evaluation and implementation and infrastructure management services. In addition, the company offers software products for the banking industry and business process management services.
Infosys trades in Nasdaq under the ticker INFY. The ADRs trade for a slight premium to what they sell for in the Indian stock market. In this segment, let us look at the Infosys business, its profit margins and see if this is a stock worth buying at the moment.
The company's main business is Software services, products and business process management. This includes developing custom applications for clients, managing/servicing their systems and managing business process outsourcing. The total revenue by different segments are - software development 20%, maintenance 31%, re-engineering 4.3%, package implementation 17.3%, consulting 3.2% and testing 5.6%. Business process management is currently at 4%.
Infosys's big customers are insurance and banking at 36%, manufacturing at 14.5%, retail at 10.2% and telecom at 16.3%. Business process management is likely to be a major growth area for the company in the upcoming years if infosys can successfully leverage the relationship it has with insurance and banking sector.
Interestingly enough, one client contributes to 5% of the revenue which is pretty significant at 100 million dollars and the top ten clients contribute to 31% of revenue. North America provides 65% of the revenue and Europe is 25.5% of revenue. The company employs 52,700 people and interestingly enough 42,700 employees earn revenue for Infosys. The employee attrition is at 11% which is about the average. The two risks to Infosys is exchange rate fluctuation with the U.S dollar and the higher cost to hire employees. The company management has plenty of experience dealing with these issues and dont expect this to materially affect the company's finances in the coming year.
Infosys revenue grew at 50% pace in 2004-2005 and by 35% rate in 2005-2006. The growth rate is expected to slow down a bit to the 25-28% range in the coming years. The operating margin has been fairly steady in the 27-28% range from 2004-2006 and is expected to be in that range through 2007. The stock dilution year over year is around 2% a year and is pretty reasonable as the company doles out employee stock options.
The company has about $6.6/share of book value and is trading for about $78=00 in the U.S market. The EPS growth has been slightly behind growth rate in the past few years, so expect it to grow at around 20-22% rate. There could be a slight upside in the EPS growth and the general growth rate itself. Taking the book value out of the stock and putting a P/E of 30 on the current earnings, we get a price of about $68=00. A P/E of 30 is a decent mark up to include other intangibles such as brand value and the value provided by management. The stock is a buy if it trades at a discount to $68-$70.
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