Is Infosys Stock the Next Incredible TCS in Making?

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Overview

Let’s dive deep into the Infosys Stock Analysis.

Infosys Stock

Infosys stock is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. From the initial capital of $ 250, the company has grown to become a $ 35 billion business in nearly 4 decades.

Infosys is a global leader in next-generation digital services and consulting. The company also has strategic partnerships with other big technology companies and has established 13 subsidiaries across the world.

Infosys stock has 52 weeks high of INR 847 and a total market capitalization of INR 2.7 trillion which makes it a Large-Cap company. The shares have a P/E ratio of 16.7 and a dividend yield of 2.91%

Now, let’s take a deep dive into the fundamentals of the company.
Infosys stock will be evaluated on 10 parameters and each would be given a rating out of 5 stars.

From this, we will arrive at a combined Infosys stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022.

The parameters are as follows:

1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
7.Efficiency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects
(All units are USD Millions except ratios and per share data)

1.Economic Moat (★ ★ ★ ★ ☆)

The company operates in the IT and technology industry where market dominance is achieved through scale, technical know-how, digital infrastructure, and workforce.

Infosys has a global presence in 46+ countries and provides digital services to 180+ fortune 500 companies across the world. The company’s clientele includes 8 out of 10 top US banks, 6 out of the top 10 global insurance companies, and 9 out of the top 10 global pharmaceutical companies.

Infosys also has a 5G lab in Syndey and a Cyberdefense center in Romania.

On the technical know-how front, the company is an innovation leader in automation, digital transformation, agile and big data.

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Also Watch: Infosys Stock Business Empire – How Big is Infosys?

The company also has 8 Innovation Hubs across the US and EU along with 9 global digital studios. On the workforce front, the company has 2.42+ lakh employees and is focused on the localization of its workforce. They also have 60,000+ employees deployed in digital business which includes chatbots, AI, apps, and platforms.

Overall the company has a wide economic moat due to its scale, market presence, innovation, and workforce but it is still not a monopoly.

Therefore this category gets 4 stars in Infosys shares fundamental analysis.

2. Business Model and Management (★ ★ ★ ★ ★)

The business model is such that 31.3% of the revenue comes from the financial services industry, 15.5% from Retail, 13% from communications, 10% from manufacturing, 7.9% comes from Hi-tech, and the remaining from life sciences and others.

The geographical distribution is such that 61.6% comes from North America, 24.4% comes from Europe, 2.6% comes from India and 11.4% comes from other 20+ countries in the world.

The strategy of the company is to grow through 4 principles which include Scale Agile Digital (Invest in digital capabilities and priority services), Energize the Core (Infuse AI and Automation), Expand Skilling (Re-skill talent pool), and drive localization (Hire locally in markets, local training, and delivery).

The company is also expanding through inorganic means which includes acquisitions of Brillant Basics, fluido and simplus along with Joint Ventures with Temasek, Hitachi, Panasonic and ABN AMRO. Overall the business model is well diversified and the focus is on core growth.

Mr. Salil Parekh is the CEO and MD of the company. Earlier he was a member of the Group Executive Board at Capgemini, where he held several leadership positions for 25 years.

He was recently accused of bypassing reviews and approvals to get bigger deals along with not recognizing full costs and hiding critical information from auditors.

However, the Infosys stock has 87% of the public shareholding and 63% independent directors, which gives it good corporate governance. Therefore this category gets 5 stars in Infosys shares fundamental analysis.

3. Growth Ratios of Infosys Stock (★ ★ ★ ★ ★)

The revenue has shown a growth of 10.5% CAGR over the last 10 years. The operating income and net income have also grown at 7.21% and 5.9% CAGR respectively.

This shows declining efficiency and profitability for the company. The working capital is also positive and has shown a linear growth. Capital expenditure has remained flat even with an increased scale. Therefore this category gets 5 stars in Infosys shares fundamental analysis.

4. Profitability Ratios of Infosys Stock (★ ★ ★ ★ ☆)

Infosys Fundamental Analysis and Future Outlook

The gross margin has been declining over the years due to wage inflation and increased cost of services delivered.

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The other margins along with return on assets have declined. This is the nature of IT business where certain unavoidable costs increase with scale. Overall the company has seen reduced profitability over the years which is not likely to improve in the future.

Therefore this category gets 4 stars in Infosys shares fundamental analysis.

5. Cash Flow Ratios of Infosys Stock (★ ★ ★ ★ ★)

Infosys Fundamental Analysis and Future Outlook

The net income margin has seen a slight decline over the years along with the Cap-Ex as a percentage of sales. This also shows that growth is driven majorly by inorganic means through JVs and acquisitions. 

The free cash flow as a percentage of net income has been positive and stable over the years. The free and operating cash flow growth has been fluctuating but this is the nature of the business. Overall the company has shown a solid cashflow position.

Therefore this category gets 5 stars in Infosys shares fundamental analysis.

6.Liquidity and Solvency Ratios of the Infosys Stock (★ ★ ★ ★ ★)

The company does not have any debt in its capital structure therefore the financial leverage and debt to equity ratio have been flat over the years.

The profitability margins have declined over the years, but this, however, is not a significant concern to the solvency of the company. The current and quick ratio has declined over the years but is still way above the minimum threshold which shows a good liquidity position.

Therefore this category gets 5 stars in Infosys shares fundamental analysis.

Infosys Fundamental Analysis and Future Outlook

7. Efficiency Ratios of the Infosys Stock (★ ★ ★ ★ ☆)

The table in the excel model is color formatted so the worst performance over the period is highlighted in red color and the best performance is highlighted by green.

Overall the business efficiency has not seen any significant changes over the years and this is because of the nature of the business.

The payable period has increased from 1 to 10 days and the receivables days have almost remained stable due to the nature of contracts. The cash conversion cycle has only seen a small decline from 68 days to 59 days and it is still positive. Therefore this category gets 4 stars in Infosys shares fundamental analysis.

Infosys Fundamental Analysis and Future Outlook

8. Valuation Ratios of the Infosys Stock (★ ★ ★ ★ ☆)

The company traded at a higher valuation since the 2013 period due to the bull rally in the Indian IT sector which was led by the digitalization of the finance industry. That year TCS gained 60% and HCL was up by 70%.

The company has managed to sustain the multiples over the years due to prudent cash generation and deployment along with expansion into new businesses.

The multiples, however, are likely to remain flat in the coming years. Therefore this category gets 4 stars in Infosys shares fundamental analysis.

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9. ROE 5 way Du Pont Analysis of the Infosys Stock (★ ★ ★ ★ ★)

The leverage ratio along with asset turnover has seen a slight increase in recent years.

The interest burden ratio has remained at 100% due to no interest-bearing debt in the capital structure of the company. The operating margin has seen a slight decline and the tax efficiency has improved.

Overall the Return on Equity has been stable even with declining profitability due to improving asset turnover.

Therefore this category gets 5 stars in Infosys shares fundamental analysis.

10. Future Prospects of the Infosys Stock and Company Business (★ ★ ★ ★ ★)

Some insights for the coming years from management discussion & analysis (MD&A) and Infosys stock con-calls are as follows.

  • The revenue guidance for FY 2020 was matched with Q4 results coming in. However, the management said considering business uncertainty emanating from Covid-19, it is unable to provide guidance on revenues and margins for FY 2021 at this stage. It will provide guidance once visibility improves.
  • The whistleblower issue is now almost resolved. The Investigation found no evidence of any wrongdoing by the company or the management. Accordingly, the company sees no necessity of restating past financial statements. While SEC investigation and a class-action lawsuit in the US on this matter are still ongoing, the company is working in full co-operation with all the regulators.
  • Slow organic growth in the BFSI segment continues due to higher-than-normal furloughs. Growth in European banks remains soft and remains healthy in North America. Softness is expected to continue for a few more quarters, although large deal wins are still led by BFSI.
  • The management focus is on margin improvement. In FY 2020 Margin was impacted by: currency (+10bp), cost optimization (+50 bp) and a dip in utilization (-40bp). Cost optimization has been giving results as the company works automation, pyramid rationalization, and onsite-offshore mix.

Overall the company has solid fundamentals, prudent cash allocation, and good growth prospects in the coming future. The margins are also expected to improve along with efficiency in the coming years.

Therefore this category gets 5 stars in Infosys stock fundamental analysis.

The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.

Overall Fundamental Rating:

INFOSYS LIMITED (4.6/5)

Therefore, Infosys Stock it is a 5-star stock

★ ★ ★ ★ ★

Infosys Stock  
Economic Moat ★ ★ ★ ★ ☆
Business & Management ★ ★ ★ ★ ★
Growth Ratios ★ ★ ★ ★ ★
Profitability Ratios ★ ★ ★ ★ ☆
Cash Flow Ratios ★ ★ ★ ★ ★
Liquidity & Solvency ★ ★ ★ ★ ★
Efficiency Ratios ★ ★ ★ ★ ☆
Valuation Ratios ★ ★ ★ ★ ☆
ROE (Du Pont Analysis) ★ ★ ★ ★ ★
Future Prospects ★ ★ ★ ★ ★
Overall Fundamental Rating ★ ★ ★ ★ ★
Infosys Stock Fundamental Analysis

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