X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Infosys: Time for a P/E de-rating? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • May 2, 2012

    Infosys: Time for a P/E de-rating?

    Stock market is a strange place. One day you are put on a very high pedestal with investors making a beeline for your stock and the next, you can come crashing down to the ground. While not exactly meeting the same fate, IT (Information Technology) heavyweight Infosys, certainly seems to have fallen off its lofty perch.

    To be honest though, the reasons behind the fall are not completely unfounded. Quarter after quarter, the company has failed to live up to its reputation of being the sector torch bearer and has ceded considerable ground to its more agile, nimbler counterparts. In fact, it is being discussed in rather hush-hush tones at the moment whether the company does deserve the high valuation multiples that the street has placed on the firm. In other words, has the time finally come for a fundamental de-rating of the stock?

    We for one do not think so. You see, to an extent, the company seems to have become a victim of its own high reputation. It had made us so used to the pattern of under promising and over delivering on the financial performance front that we had almost started taking it for granted. And thus, when that pattern finally broke, it made investors quite nervous.

    In the larger scheme of things though, it does remain amongst the best performing blue chips in India. After all, how many blue chips could boast of growing its topline and bottomline by 19% and 16% CAGR (compounded annual growth rate) respectively in the last five years and that too with virtually no debt? And with the IT outsourcing story far from over, there is no reason why a similar performance cannot be repeated over the long term period.

    There's one more reason why a few quarters of underperformance should not lead to a fundamental de-rating of the stock. And this has to do with how the value of a stock accumulates over time. You see, unlike a bond that has a limited time period, stocks do not come with an expiry date and thus, their duration could be extremely long. Now, if we imagine that half the earnings of a firm are distributed as dividends and half reinvested in the business, we will have a stream of cash flows that will keep on growing at a constant rate in the future.

    Source: Equitymaster.com

    As shown in the chart above, nearly 25% of a firm's total value comes from cash flows in the first 10 years. And cash flows for the first 25 years account for only 50% of the firm's value. Now here comes the interesting point. You see, even if a firm's cash flows were to fall by 50% over the next five years, the total impact it will have on the firm's value is to the extent of just 5%. This is because 5 years worth of cash flows account for just around 10% of the firm's value. Besides, even if the problem lasts for 10 years, the value that will be eroded will be to the tune of just 11%-12%.

    Of course, Infosys cannot keep on growing its cash flows for the next 100 years and hence, the erosion in its value is likely to be much more. But it should also be noted that it has not suffered fall in cash flows to the tune of 50% in the distant past. In fact, the main concern with the stock is that it will report lower growth in earnings and hardly any fall in the same for a sustained period of time.

    Thus, to argue that the stock's P/E should be de-rated is a bit premature we believe. It still seems to have many good years ahead of it. And if the markets do make this mistake, loading up on the stock for the long term will be a high return and low risk proposition as per us.

      Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.

     

     

    Equitymaster requests your view! Post a comment on "Infosys: Time for a P/E de-rating?". Click here!

      
     

    More Views on News

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Infosys: A Flat End to FY17 (Quarterly Results Update - Detailed)

    Apr 13, 2017

    Infosys ends FY17 with a 7% QoQ fall in net profit for the March quarter.

    Infosys: A Decent Quarter (Quarterly Results Update - Detailed)

    Jan 13, 2017

    Infosys has reported a 0.2% QoQ decrease in the topline and an increase of 4.6% QoQ in the bottomline for the quarter ended December 2016.

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    INFOSYS LTD SHARE PRICE


    Aug 21, 2017 (Close)

    TRACK INFOSYS LTD

    • Track your investment in INFOSYS LTD with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    INFOSYS LTD - KINGDEE INTER. COMPARISON

    Compare Company With Charts

    COMPARE INFOSYS LTD WITH

    MARKET STATS