"In simplest terms, a leader is one who knows where he wants to go, and gets up, and goes." Infosys is one of few companies that have learned and actually implemented this maxim. Infosys, the benchmark of Indian IT industry needs no introduction. It has set a trend wherein it finds solace only by growing at a rate unmatched by its peers. The company has consistently outperformed analysts' earnings estimate and emerged as a winner on the bourses (although off late the NASDAQ effect has taken its toll).
Infosys has been a leader and not just in terms of growth. In the past 5 years while Infosys’ revenues have grown at a compounded annual growth rate (CAGR) of 77.7 percent, profits increased at a CAGR of 92.1 percent. The company was one of few companies to take concrete measures to move up the value chain in software services. As a consequence, when other software companies were generating large revenues from Y2K business, Infosys’ revenues from this source declined to 0.9 percent in fourth quarter of financial year 2000 (24 percent in the first quarter of financial year 1999).
Not surprisingly, Infosys is a leader in the e-commerce space. Revenues from Internet related business (e-commerce) have increased to 18.8 percent (1.3 percent in the first quarter of financial year 1999) during fourth quarter of financial year 2000. The company’s e-business strategy focuses on e-enabling traditional economy to Fortune 1,000 companies across the globe. It has the ability to assimilate technologies enabling it to offer a highly compelling value proposition. Infosys has forayed into high-end of e-commerce including CRM (Customer Relationship Management) and SCM (Supply Chain Management) much ahead of time in financial year 1999 when most of companies were consolidating their position.
E-commerce rapidly covering the Y2K gap
The logical conclusion to the company’s attempts to move up the value chain should have been the introduction of products. Infosys, which earlier had a not so successful Bancs2000, has launched a number of products targeted at the banking sector. These include BankAway, a WAP (Wireless Application Protocol) enabled e-commerce platform, which is already being used by four of the six banks offering Internet services in the country. Other products include PayAway, a universal bill payment software. Finally, the company has launched its high profile core banking solution – Finacle. The product leverages Internet technology to drive the operations of the bank.
Having grown organically, the company is exploring the opportunities to grow inorganically. The example of this strategy is ‘Onscan’. As part of its ongoing effort to encourage and promote budding entrepreneurs among its employees, the company has incubated ‘Onscan’ a web based wireless enabled notification service. It has earned profits of Rs 55 million in the first quarter of June 2000 by transferring the intellectual property rights of the product to Onscan Inc. Initiatives such as this and the multitude of alliances and ventures entered into by the company have lent a degree of credibility to the claim that the company will sustain its current growth trajectory in coming years.
High growth is always accompanied by high risk. Infosys has adopted a de-risking model, which does not allow the company to have excessive dependence on any one client, service and vertical market. Although revenues from large clients and repeat business lead to higher revenue growth and lower marketing cost, the company has chosen to limit the revenue from any one client to 10 percent of total revenues. This is a significant move that will enable Infosys to grow with a very limited risk of major failure. The other risk is the high marketing cost and the probability of failure of the product in the market. The higher margins in this business however justify the company’s venture.
Infosys has consistently earned a return on capital employed (ROCE) of more than 100 percent on its core capital. The interesting fact is its cash flow of Rs 4.3 billion is more than its core capital employed. Hence once these funds are utilised for the company's core business (or for acquisitions) the returns from it could be significant.
At this point it is clear that Infosys story is untouched. Strong growth underpinned by a high quality management is driving the performance of the company. Despite its impressive growth record the stock would appear to be expensive by any conventional valuation parameter. It has been observed that Infosys has been getting a premium valuation even when compared with some global software majors. The company’s future valuations will depend on its ability to maintain a high growth rate (fuelled either organically or by acquisitions) and move up the value chain.
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: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407