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Infosys Vs Sensex - Views on News from Equitymaster
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  • Apr 13, 2005

    Infosys Vs Sensex

    Infosys Technologies is India's second-largest software services exporter. It is the technology bellwether and is taken as the benchmark for all other software companies to follow. With the upcoming results of the company due to be announced on April 14, we analyse as to how Infosys has fared vis-a-vis the BSE-Sensex in terms of returns earned over the past 3 years and debate as to whether the risk that one takes while investing in the Infosys stock is justified by the returns generated.

    Outperformer on the bourses…

    As can be seen from the chart, if an investor had invested Rs 100 in the Infosys stock in April 2002, then over a period of 3 years till March 2005, he/she would have multiplied his/her money over 2.5 times! The figure for the BSE Sensex would have been less than twice the invested amount.

    The CAGR over the period works out to around 35.6% for Infosys. For the Sensex, the corresponding figure is 24.8%. We have taken a three-year time frame for comparison because we believe that equities are a long-term investment and comparison over a shorter time frame would not account for any glitches or short-term falls in the markets due to factors such as weak sentiment, economic recession, one or two quarters of poor performance by the company and other such short-term factors. Another reason is that 2003 and 2004 were bull market years and would have skewed the figures as the Sensex gave phenomenal returns in that period. Therefore, in order to even out returns and reduce the bias, we have taken a period of three years.

    …and on financial performance as well!

    Infosys has been a star performer on the bourses mainly due to its sterling financial performance in terms of topline and bottomline. In the period from April 2002 to March 2005, revenues have grown at a CAGR of nearly 40% and profits have grown at a CAGR of around 29%. The Sensex companies have also maintained an impressive growth rate in the region of 15% to 20% CAGR between FY02 and FY05. Returns on the Sensex have thus, largely mirrored their financial performance.

    Drivers of growth for Infosys

    There have been a number of reasons for such a scorching pace of growth that Infosys has maintained over the past few years. The company has scalable business model based on the success of the much-acclaimed global delivery model perfected by Indian companies, a visionary management that is able to foresee trends for the future and a skilled and dedicated work force.

    Over the years, Infosys has steadily climbed the value chain, going into high-value services like IT consulting and package implementation. This has resulted in a higher proportion of work onsite. Billing rates are higher for such services and could be one of the reasons as to why revenues have grown faster than profits. Another reason is that as the company has moved higher up the value chain, margins have declined due to higher costs. Therefore, profitability has been impacted to an extent. The rupee-dollar exchange rate has also been unfavourable to the company in the past year, with the rupee showing a sustained appreciation. However, despite these factors, Infosys has managed to ramp up business to such an extent that an increase in sheer volume of work has more than compensated for the negative impact.

    What can we expect?

    Going forward, Infosys is expected to continue on a high-growth path. As the company moves up the value chain, due to higher billing rates earned, revenues are expected to maintain a strong growth. As the company moves a greater proportion of work offshore after gaining competencies in higher-end services, margin decline will also be pared to an extent. Employee ramp up is expected to continue at a high rate as well. This will result in concerns on the employee costs front, especially given the fact that as a greater number of personnel are deputed onsite, higher salaries and fees will have to be forked out by the company to enable successful implementation of high-end tasks. Attrition rates could also be of concern and Infosys will have to take initiatives on the employee front to ensure that this is minimized.

    The company is slated to announce its FY05 results tomorrow. We will update our research report on the company post the same.



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    Aug 18, 2017 12:42 PM


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