Company Update
August 30, 2016
Rating matrix
Rating
Target
Target Period
Potential Upside
:
:
:
:
Infosys (INFTEC)
Buy
| 1290
12 months
26%
Renew & new strategy to navigate headwinds
Whats Changed?
Target
EPS FY17E
EPS FY18E
Rating
Unchanged
Unchanged
Unchanged
Unchanged
Key Financials
| Crore
Net Sales
EBITDA
Net Profit
EPS (|)
FY15
53,319
14,901
2,369
53.9
FY16
62,441
17,078
2,394
59.0
FY17E
70,022
19,241
9,421
64.7
FY18E
78,825
21,336
2,374
71.8
FY15
18.9
23.9
13.5
4.3
22.5
31.4
FY16
17.3
21.9
11.6
3.8
21.8
30.2
FY17E
15.8
19.9
10.1
3.4
21.4
30.0
FY18E
14.2
18.0
8.8
3.0
21.2
29.8
Valuation summary
P/E
Target P/E
EV / EBITDA
P/BV
RoNW (%)
RoCE (%)
Stock data
Particular
Market Capitalization (| Crore)
Total Debt
Cash and Investments
EV (| Crore)
52 week H/L
Equity capital
Face value
Amount
233,352.0
32,697.0
187,037.2
1278 / 1009
1,144.0
|5
Price Performance
TCS
Infosys
Wipro
HCL Tech
| 1021
1M
3M
6M
12M
0.6
(2.5)
(2.5)
(10.5)
9.1
7.6
0.9
(11.2)
7.4
18.5
(1.5)
(11.4)
(3.5)
18.1
(2.6)
(23.9)
Research Analysts
Deepak Purswani, CFA
[email protected]
Tushar Wavhal
[email protected]
Deepti Tayal
[email protected]
ICICI Securities Ltd | Retail Equity Research
Infosys Technologies (Infy) held its analyst meet to articulate its strategies
in the midst of a cautious business environment prevailing in the industry.
The management did highlight that Q2FY17 would be better than Q1FY17
by addressing challenges in consulting vertical while Finacle witnessed it
in Q1FY17. However, the management cited caution about the business
environment on account of uncertainty prevailing across the industry and
due to client specific concerns post Brexit. While Infosys would evaluate
its full year FY17 revenue guidance of 10.5-12% in CC terms post Q2FY17
results, an overall cautious environment post Brexit could pose a risk to
its FY17 guidance, in our view. On the other hand, the companys dual
strategy of renew and new along with automation platforms as Mana is
going on the right trajectory paving the way for the companys growth on
a long term basis.
Ca utio us envi ro nme nt ma y pos e r is k to FY17E guidance
The management cited caution about the business environment on
account of uncertainty prevailing across the industry and due to client
specific concerns post Brexit. Nonetheless, Infosys anticipates Q2 will be
better than Q1, backed by strong execution. The management reported
that a decline in core business (3.6% QoQ, 11.2% YoY) was mainly
attributable to challenges in the consulting business. However, it expects
India business units and its Finacle business to grow in Q2 and feels the
de-growth in consulting business was by and large arrested in the current
quarter. Furthermore, the management expects the Indian projects to
gain momentum. In our view, this could offset the impact of Royal Bank of
Scotland (RBS) deal cancellation announced earlier this month. Overall,
the management would evaluate its full earlier revenue guidance of 10.512% in CC terms post Q2FY17 results. In our view, an overall cautious
environment post Brexit could pose a risk to its FY17 guidance.
Re it era t es i t s re new co re & i nn o v at e n ew st r at egy
The company reiterated its dual strategy of renewing the core business
and entering into new businesses for driving growth, along with the third
pillar of culture of learning, creativity and purpose. The dual strategy has
led to top accounts growth (average size of 10 accounts grew 8.0%YoY to
$ 217 million in Q1FY17) and large deal wins (TCV grew 45% YoY at $ 2.8
billion in FY16). According to Infy, a fundamental improvement in renewal
business is from automation along with artificial intelligence capabilities. It
will continue to focus on automation and innovation by bringing more
new age products such as Mana, Skava and Panaya on its platform, which
are playing a key role in improving productivity. The management
alleviates concern over the senior management exits as it mentions large
part of it was performance based. Furthermore, to bring next generation
leaders, the company is expanding the bandwidth of the business with
addition of small business units of size ~$500-700 million, thereby leading
to more focus on strategic initiatives.
Clear picture on guidance post Q2FY17; maintain BUY
While Infosys would evaluate its FY17 guidance post Q2FY17 results due
to the impact of near term headwinds, the efforts towards Renew & New
strategy such as increase in large deal win and top client revenues would
pay off over the medium term. We expect Infosys revenues to grow at a
CAGR of 12.4% with average EBIT margin of 25.1% over FY16-18E.
Hence, we maintain our BUY recommendation on Infosys with a revised
target price of | 1290 (18x its FY18E EPS).
Financial summary
Profit and loss statement
(Year-end March)
Total operating Income
Growth (%)
| Crore
Cash flow statement
FY15
FY16
FY17E
FY18E
(Year-end March)
53,319
62,441
70,022
78,825
Profit after Tax
| Crore
FY15
FY16
FY17E
FY18E
12,329
13,491
14,793
16,402
6.4
17.1
12.1
12.6
31,814
37,640
42,308
48,030
Admin expenses
3,663
4,292
4,691
5,202
Inc/(dec) in CL and Provisions
873
842
1,234
1,154
S&M expenses
2,941
3,431
3,781
4,257
Taxes paid
(6,751)
(5,865)
(6,042)
(6,699)
Total Operating Expenditure
38,418
45,363
50,781
57,488
CF from operating activities
10,752
12,243
12,283
13,701
EBITDA
14,901
17,078
19,241
21,336
(Inc)/dec in Investments*
1,101
88
3,100
3,500
Growth (%)
11.1
14.6
12.7
10.9
(Inc)/dec in Fixed Assets
(2,247)
(2,723)
(2,500)
(2,500)
Depreciation
1,069
1,459
1,506
1,735
CF from investing activities
(1,279)
(3,116)
600
1,000
Other Income
3,427
3,125
3,100
3,500
Dividend paid & dividend tax
(4,935)
(6,813)
(7,488)
(8,290)
17,258
18,742
20,835
23,101
4,929
5,251
6,042
6,699
12,329
13,491
14,793
16,402
15.8
9.4
9.7
10.9
54
59
65
72
15.8
9.4
9.7
10.9
COGS (employee expenses)
PBT
Total Tax
PAT
Growth (%)
EPS (|)
Growth (%)
Source: Company, ICICIdirect.com Research
Add: Depreciation
1,069
1,459
1,506
1,735
(Inc)/dec in Current Assets
(2,004)
(3,096)
(2,150)
(2,090)
CF from financing activities
Others
(4,935)
(6,813)
(7,488)
(8,290)
Net Cash flow
4,538
2,314
5,396
6,411
(121)
16
Opening Cash
25,950
30,367
32,697
38,093
Closing Cash
30,367
32,697
38,093
44,504
FY15
FY16
FY17E
FY18E
71.8
Exchange difference
Source: Company, ICICIdirect.com Research
Balance sheet
| Crore
Key ratios
FY15
FY16
FY17E
FY18E
(Year-end March)
572
1,144
1,144
1,144
Per share data (|)
Reserve and Surplus
54,191
60,635
67,940
76,052
EPS
53.9
59.0
64.7
Total Shareholders funds
54,763
61,779
69,084
77,196
Cash EPS
58.6
65.4
71.3
79.3
239.6
270.3
302.2
337.7
(Year-end March)
Equity Capital
Employee benefit obligations
Debt
Deferred Tax Liability
160
256
256
256
Cash Per Share
Operating Ratios (%)
Other non current liabilties
Total Liabilities
BV
46
115
115
115
54,969
62,150
69,455
77,567
Assets
DPS
24.5
28.0
31.0
132.9
143.1
166.7
194.7
EBIT Margin
25.9
25.0
25.3
24.9
PBT Margin
32.4
30.0
29.8
29.3
Property,plant and equipment
9,125
10,530
11,524
12,289
PAT Margin
23.1
21.6
21.1
20.8
Goodwill
3,091
3,764
3,764
3,764
Debtor days
66
66
66
66
638
985
985
985
Unbilled revenue
19
17
18
18
Available for sale assets
1,345
1,811
1,811
1,811
Creditor days
Other assets
4,864
6,501
6,501
6,501
Return Ratios (%)
21.2
Intangibles
30,367
32,697
38,093
44,504
RoE
22.5
21.8
21.4
Investment in CD
Cash
RoCE
31.4
30.2
30.0
29.8
Trade receivables
9,713
11,330
12,756
14,359
RoIC
68.9
65.7
69.0
71.6
Unbilled revenue
2,845
3,029
3,736
4,206
101
116
133
149
Other current assets
4,170
4,523
4,523
4,523
Total Current Assets
47,196
51,695
59,241
67,741
140
386
184
Unearned revenue
1,052
1,332
OCL & provisions
10,188
Total Current Liabilities
Net Current Assets
Application of Funds
54,969
Prepayment & O.fin.assets
Trade payables
Valuation Ratios (x)
P/E
18.9
17.3
15.8
14.2
EV / EBITDA
13.5
11.6
10.1
8.8
EV / Net Sales
3.8
3.2
2.8
2.4
207
Market Cap / Sales
4.4
3.7
3.3
3.0
1,382
1,555
Price to Book Value
4.3
3.8
3.4
3.0
11,516
12,903
13,860
11,383
13,239
14,473
15,627
35,813
38,456
44,768
52,115
62,150
69,455
77,567
Source: Company, ICICIdirect.com Research
Solvency Ratios
Debt/EBITDA
Debt / Equity
Current Ratio
1.9
1.9
1.9
1.9
Quick Ratio
1.9
1.9
1.9
1.9
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research
Page 2
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey
Head Research
[email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
[email protected]ICICI Securities Ltd | Retail Equity Research
Page 3
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