Intensifying attention to Digital Verticals, Infosys to strengthen its Market Position!

Strengthening employee moat and strong foray into digital services – Infosys expects a high growth!

Infosys Limited is an Indian multinational corporation that provides business consulting, information technology, outsourcing, and next-generation digital services. Infosys has 123 development centres across the world as of March 31, 2019, with major operative centres in India. It’s total client base at the end of FY19 stood at 1279. It is the second-largest Indian IT company with an employee strength of 2,28,123 people. The Market Capitalization of Infosys was USD 49.4 Billion as of October 11, 2019.

Revenue of Infosys as on 31st March 2019 was INR 82,675 Crores. During the past 5 years, it grew by 11%. In the last year, it grew by 17.2%. The Operating Profit Margin (EBIT) was of Infosys stood at 22.8% for FY 2019. Infosys reported a revenue of INR 22,629 Crores for Q2FY20. Strong growth of 9.8% on a Year-on-Year basis was recorded with an operating profit margin of 21.7% which has been on a decline for the past few years but an improvement has been seen from the previous quarter.

Infosys will further strengthen its position in the ‘digital services’ market.

In FY 2019, the global market for software and services is estimated to have grown to USD 1.4 trillion. IT Services is estimated to grow by 3.2% Year-on-Year, driven by strong growth in digital engagements, particularly cloud adoption. India’s IT industry grew to USD 181 billion in 2018-19 at a rate of 8.4% YoY.

Infosys MOAT is its Human Resource skills deep with domain expertise in Multiple Business Verticals, Technology Skills, Offshore Development Centre and 1200+ global clients which give it longevity, sustainable margins, and business growth.

Believing in Digital Services as a massive opportunity, Infosys sees the cloud, analytics and digital technologies as a Multi-Billion Dollar Businesses and is now primarily focused on it.

The revenue of Infosys for FY19 was INR 82675 Crores, with INR 56,880 Crores coming from Core Services grew at about 7% and INR 25,795 Crores contributed by Digital Services which is growing by about 40% YOY.

The revenue of Infosys is segregated into two parts, digital services, and core services. Digital services revenue was INR 25,795 Crores, which accounted for 31.2% of revenue in FY19 and grew 43.4% in Rupee terms YoY. In Digital services, the key areas are Cloud-Related Services, Data Analytics, IoT, Cyber Security, and Customer Experience.

Infosys can beat the industry growth rate due to its competitive position. The revenue growth for Core services is expected to remain muted while for digital services it is expected to grow rapidly by about 30%+ for immediate few years and then tapering down to normal industry growth. Digital services business globally is about $160 Billion and growing at about 15%. Infosys expects to have 15% market share gains in this vertical. Infosys digital services business grew about 38.4% contributing 38.3% towards revenue in Q2 2020.

In this 1 Trillion Dollar Industry, Infosys experiences intensified competition in traditional and digital services against players such as TCS, IBM, Accenture, HCL Technologies Wipro, etc.

The company is planning to increase its profit margins by reducing the number of employees deployed on-site while increasing local hiring. Infosys also completed its localization target of hiring 10,000+ local employees in the U.S.A this year.

Infosys reported an operating profit margin of 21.7% for Q2 of FY2020. The Margin showed improvement over the previous quarter which had a steep fall from 23.61% reported for FY 2019 to 20.5% in Q1 2020 because of rising manpower costs, rupee appreciation, Visa costs and playing catch-up with other IT firms in digital services. The management expects to improve margins by bringing down On-Site – Offshore deployment ratio and improved yields.

Expectation Valuation

Expectation valuation is a concept that deals with Market Price of a Stock and helps understand the Value Drivers built in the Stock Price. The inputs of Value Drivers like Forecast Period, Inflation rate, CAGR of Sales, OPM, Incremental Investment Rate, Cost of Debt and Equity are iterated to equate the Shareholder Value to Market Capitalization. Once the iteration is complete one can then arrive at the Valuation, based on their own assumptions, to analyse the gap between Price and Value. Multiple such valuations can be conducted by simply tweaking the assumptions.

Price Scenario: Iterate the Value Drivers to Equate the Shareholder Value toMarket Capitalization.
Value Scenario: Input own assumptions of Value Drivers to arrive at Intrinsic Value.

To learn more terms like Expectation Valuation click on this FAQs link- FAQs

Expectation Valuation Inputs for Infosys

Based on the above Narrative, the following inputs for Valuation of Infosys have been considered. Any difference in inputs of price and value is mentioned under the Change column.

Notes:

• Cost of Equity has been computed using Capital Asset Pricing Model (CAPM). Click on the History Icon in the App to view its computation. Cost of Equity also implies the Expected Return on the Stock if the undertaken assumptions hold true. The Risk Free rate is 6.68%, Expected Market Return is 10.23%. In the above plan, Beta is 0.4 and Adjusted beta is 0.6. Cost of Equity is calculated using Adjusted Beta. Cost of Equity calculation is as stated : 6.68% + 0.6 x (10.23% – 6.68%)

• With a change in the narrative, inputs of value drivers must be modified to arrive at a Valuation

• View the Free Cash Flow Report and Valuation Report to get a better insight and perspective. Estimated Future Value Per Share is also available on the Valuation Report.

On iteration, one can say that a Sales Growth of 7% for 10 Years with a Target Operating Margin of 21.75% is built in the price of INR 813 Per Share. Shareholder Value is at INR 3493 Billion, which is approximately equal to the Market Capitalization of Infosys Ltd.

Shareholder Value Per Share for the Value Scenario is assumed at a Sales Growth of 10% for 10 Years with a Target Operating Profit Margin of 23%. Other inputs are kept same under both the Scenarios.

Is the Market ignoring the opportunity in Digital Service Growth?
Check out this plan: Infosys Ltd - O2 2020