Infosys Technologies Ltd., one of India’s largest software company and most recognised company enjoys the premium valuation in the market due to its ability to maintain higher profit growth rate and continuous new business development.
The revenues of the company are likely to go up considerably in the coming years on account of government’s decision to permit acquisition upto 10 times of export earnings. This will enable the company to make acquisition of up to $ 2 bn without approvals given its exports earnings of $200 m. Also as on March 2000, the company has cash flow of Rs 4.3 bn which is likely to be used for acquisition of software companies abroad. Once these cash flows are utilised for the company’s core business, the returns from it could be immense and the profitability of the company could increase manifold.
The company is in the early stages of drawing up a strategy to replicate its Indian model of operations in China. The strategy would revolve around setting up software development centres in China to cater to the Singapore, Taiwan and Japanese markets in addition to the local market. It is moving up its value chain by entering into the segment such as internet, e-commerce and related areas where margins are high.
In India Infosys enjoys comparatively premium valuation due to its excellent profit growth, superior quality of management and ability to move up the value chain rapidly. It enjoys the highest profit margins in the software consultancy services companies due to its lower man power cost. As long as the company maintains profit growth of more than 80% and profit margins of around 30%, it would continue to enjoy the premium valuations. However intense competition and increasing employee cost is likely to pressurize margins of the company in future.
Comparative valuation with Indian companies
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Infosys' valuations cannot be compared with most Indian IT companies as well as its global peers. It has been observed that Infosys has been getting a premium valuation even when compared with the global IT majors. The strong management abilities, high intellectual capital, growth prospects and ability to forsee the future justifies such premium valuation.
It has free cash of Rs 4.3 bn, which is more than its core capital employed. The company generates returns of more than 75% on its core capital (excluding investment and cash) employed. Hence, once the funds are employed for its business purpose, it will show the ability to earn similar return on these funds also leading to exponential growth in profit. The adoption of business de-risking model will enable Infosys to grow with a very limited risk of major failure.
Comparative valuation with International companies
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