Infosys: Time for a P/E de-rating? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

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

May 2, 2012

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

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 2019-20 Annual Report Analysis (Annual Result Update)

Aug 5, 2020 | Updated on Aug 5, 2020

Here's an analysis of the annual report of INFOSYS for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of INFOSYS. Also includes updates on the valuation of INFOSYS.

INFOSYS Announces Quarterly Results (1QFY21); Net Profit Up 12.4% (Quarterly Result Update)

Jul 16, 2020 | Updated on Jul 16, 2020

For the quarter ended June 2020, INFOSYS has posted a net profit of Rs 43 bn (up 12.4% YoY). Sales on the other hand came in at Rs 237 bn (up 8.5% YoY). Read on for a complete analysis of INFOSYS's quarterly results.

INFOSYS Announces Quarterly Results (4QFY20); Net Profit Up 6.3% (Quarterly Result Update)

Apr 21, 2020 | Updated on Apr 21, 2020

For the quarter ended March 2020, INFOSYS has posted a net profit of Rs 43 bn (up 6.3% YoY). Sales on the other hand came in at Rs 233 bn (up 8.0% YoY). Read on for a complete analysis of INFOSYS's quarterly results.

INFOSYS 2018-19 Annual Report Analysis (Annual Result Update)

May 21, 2019 | Updated on May 21, 2019

Here's an analysis of the annual report of INFOSYS for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of INFOSYS. Also includes updates on the valuation of INFOSYS.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

INFOSYS SHARE PRICE


Sep 24, 2020 (Close)

TRACK INFOSYS

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

INFOSYS - CHINASOFT COMPARISON

COMPARE INFOSYS WITH

MARKET STATS