Infosys

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Valuation by Tanushree Seth

Company Snapshot:

Company Snapshot Global Headquarters: Bangalore, India Founded: 1981 Global Presence: 36 Sales Offices in 17 countries 37 Global Development Centers Employees: 49,422 LTM Dec ’05 Revenue/ 5 Year CAGR: $2,014 million/ 41% LTM Dec ’05 Net Income/ 5 Year CAGR: $530 million/ 37%

Company Statistics:

Company Statistics Employer Type: Public Company Stock Symbol: INFY Stock Exchange: NASDAQ Market Share price: $74.98* Key Executives President, CEO, MD: N. R. Narayana Murthy Nandan M Nilekani T. V. Mohandas PaiS. Gopalakrishnan V. BalakrishnanK. DineshS. D ShibulalSrinath Batni *As of 4/14/2006 CEO, President and MD: N.R. Narayan Murthy

Outline:

Outline Overview Investment Highlights Business model Investment positives Addressing Key market challenges: Risks Valuation Estimated growth rates of 30% and 25% Comparable company analysis Recommendation

Overview:

Overview Smart investments In 1999, the firm became the first Indian company to list on NASDAQ In 2002, Infosys started a recruiting and marketing blitz The firm registered sales of $740 million, up 50 percent over the previous year, 2002 In 2004, , the firm hit its first billion

Overview:

Overview The U.S. dream team The company turned its attention to the U.S. consulting market in April 2004, forming Infosys Consulting Stephen Pratt, who was named CEO of the subsidiary; Romil Bahl, former head of EDS' consulting practice; Pal Cole, former head of global operations at CGE&Y; and Raj Joshi, former CEO of Deloitte Offshore. In April 2004, the publication eWeek.com pointed out that the move was a step toward competing in the U.S. consulting market against the big guys like Accenture.

Moving forward:

Moving forward In 2003, Infosys launched a business-processing subsidiary, Progeon, and secured a five-year, $30-million contract from U.S. mortgage firm GreenPoint. In November 2004, Infosys and Microsoft announced an enterprise IT transformation initiative In December 2003, the firm announced its intentions to acquire Expert Information Services, an Australian IT services firm, for around $23 million.

Infosys Work Culture:

Infosys Work Culture Open-door culture Hard work, lots of passion A piece of heaven in Bangalore

Investment Highlights:

Investment Highlights Large, Expanding Addressable Market Highly-evolved Global Delivery Model Rapid Differentiation Scalable Execution Exceptional Financial performance

Large, Expandable Addressable Market :

Large, Expandable Addressable Market

Offshore Outsourcing is a Mega Trend:

Offshore Outsourcing is a Mega Trend Outsourcing benefits: Convert fixed costs to variable Reduce TCO, enhance ROI Improve competitiveness Offshore benefits: Deliver high quality at great value Highly scalable with no foreseeable supply constraints Proven track record Addressable market has increased Source: Infosys

India: #1 Offshore Destination:

India: #1 Offshore Destination The India Advantage: Strong Track Record High quality delivery Significant costs benefits Strong government support Mature industry Man Power Education system 24 x 7 working model advantage Source: Infosys: IDC Offshore Best Practices Enterprise Survey, 2004 Corporate Executives’ Preferred Destinations for Offshore IT Services

Infosys is a Premier Global IT Services Firm:

Infosys is a Premier Global IT Services Firm Key competitive advantages Extensive domain knowledge and expertise Comprehensive offerings Long-term relationships with blue chip clients Proven Global Delivery Model Execution excellence Competent leadership and management team Source: Infosys and Gartner 2004 5 year CAGR (LTM Dec 00-LTM Dec 05) Global IT Services 5% India IT Exports 29% Infosys 41%

Business Model: Highly-evolved Global Delivery Model:

Business Model: Highly-evolved Global Delivery Model

Highly-evolved Global Delivery Model:

Highly-evolved Global Delivery Model Stage 1 Stage 2 Stage 3 Client Requirements Infosys Delivery Run the business Grow the business Transform the business GDM GDM+ GDM+ Consulting

Infosys’ Global Delivery Model :

Infosys’ Global Delivery Model 1981 ____________ 1996 ______________ 2001 ________________ 2005 ________

Differentiation within the IT industry:

Differentiation within the IT industry

Uniquely Positioned in Global IT Services and Consulting:

Uniquely Positioned in Global IT Services and Consulting IN PROCESS Consulting + Solution mindset Build stronger brand Strengthen Board-level relationships NEED TO: Replace resources Overcome “offshore-is-cost-center” mindset Combat revenue cannibalization Provide seamless sales and delivery Reduce SG&A

Applying GDM to Consulting:

Applying GDM to Consulting Significantly lower total cost of engagement Lower IT implementation cost = flexibility in solution delivery Greater ability to invest in managing business change ----------------------------------------------------- Client Budget 35% lowering total cost -------|

Drivers of Scalability:

Drivers of Scalability Superior Talent Management World Class Processes and Systems Flexible Organization Structure Modular and Robust Global Infrastructure SCALABLE EXECUTION LEADS TO

Scalable Execution:

Scalable Execution Superior Talent Management: Hiring the Best Able to simultaneously evaluate 10,000 people across 7 cities in India Augmenting talent through new geographies China, Eastern Europe Supplementing with experienced local hires Currently hiring people 59 nationalities World Class Processes and Systems Quality par excellence: Benchmarked to Global Standards such as EFQM Award-winning Knowledge Management Processes PRIDE 2004 Asian MAKE Award

Scalable Execution:

Scalable Execution Flexible Organization Structure Integrated platform for delivery of end-to-end solutions from Consulting to BPM Self-governed business units By domain By Market By Service Modular and Robust Infrastructure 37 Global Development Centers (“GDC”) Ability to rapidly scale new engagements Flexibility to distribute engagements and capacity across centers worldwide

Exceptional Financial Performance :

Exceptional Financial Performance

Superior Revenue Growth:

Superior Revenue Growth

Sustained Industry-leading Profitability:

Sustained Industry-leading Profitability

Addressing Key Market Challenges:

Addressing Key Market Challenges Challenges Competitive Pricing Onsite/offshore effort Investment in sales and marketing Economic Wage inflation US$/Rupee exchange rate Infosys Strategy Continue to penetrate high value-add segments Leverage GDM+ Enhance internal productivity Leverage economies of scale and brand Move to variable salary structure and role-based compensation Proactively hedge currency exposure

Valuation:

Valuation Inputs: Current EBIT = $491,000,000.00 Current Interest Expense = $0.00 Current Capital Spending $186,000,000.00 Current Depreciation & Amortization = $66,000,000.00 Tax Rate on Income = 14.66% Current Revenues = $1,592,000,000.00 Current Non-cash Working Capital = $302,000,000.00 Chg. Working Capital = $152,852,304.00 Cash and Marketable Securities $688,000,000.00 Value of equity options issued by firm = $52,000,000.00 Book Value of Debt = $180,000,000.00 Book Value of Equity = $1,253,000,000.00

Valuation:

Valuation Market Value per share= $75 Number of shares outstanding= 274,530,000 Market Value of Debt= $180,000,000 Length of extraordinary growth period= 10 years Beta of the stock= 2.03 Risk Free rate= 4.86 Risk Premium= 6.60% Cost of Debt= 5.63% Estimated Growth= 30%

Valuation:

Valuation Outputs: Return on capital= 27.20% Reinvestment Rate= 11% Cost of Equity= 18.26% Equity/(Debt+Equity)= 99.13% After-tax Cost of debt= 4.80% Debt/(Debt+Equity)= 0.87% WACC: 18.14%

Valuation:

Valuation Current EBIT * (1 – tax rate) $419,019,400 - (Capital Spending – Depreciation) $120,000,000 - Change in WC $152,852,304 Current FCFF: $146,167,096.00

NPV of FCFF:

NPV of FCFF EBIT * (1 - tax rate) 2006 $586,198,084.13 2007 $820,077,050.95 - (CapEx-Depreciation) $167,877,120.00 $234,856,061.83 -Chg. Working Capital $120,490,752.00 $168,563,670.27 Free Cash flow to Firm $297,830,212.13 $416,657,318.85 Present Value $252,096,381.22 $298,520,895.88

NPV of FCFF:

NPV of FCFF EBIT * (1 - tax rate) 2010 $2,245,357,256.2 2011 $3,141,200,912.8 2012 $4,394,464,688.31 2013 $6,147,750,631.7 - (CapEx-Depreciation) $643,031,971.19 $899,586,294.92 $1,258,499,636.53 $1,760,610,787.5 -Chg. Working Capital $461,524,511.31 $645,661,714.74 $903,265,243.03 $1,263,646,396.6 Free Cash flow to Firm $1,140,800,773.7 $1,595,952,903.2 $2,232,699,808.75 $3,123,493,447.6 Present Value $495,677,391.45 $586,958,282.56 $695,048,899.58 $823,044,817.93

NPV of FCFF:

NPV of FCFF EBIT * (1 - tax rate) 2014 $8,600,555,587.86 2015 $12,031,970,854.09 Terminal Year $12,633,569,396.79 - (CapEx-Depreciation) $2,463,052,237.07 $3,445,750,966.40 $3,158,392,349.20 -Chg. Working Capital $1,767,810,981.38 $2,473,125,135.49 $0.00 Free Cash flow to Firm $4,369,692,369.41 $6,113,094,752.19 $9,475,177,047.59 Present Value $974,611,675.13 $1,154,090,149.91

NPV of FCFF:

NPV of FCFF Present Value of FCFF in high growth phase = $6,052,135,216.05 Present Value of Terminal Value of Firm = $13,612,066,744.99 Value of the firm = $19,664,201,961.04 Cash and Marketable Securities = $688,000,000.00 Market Value of outstanding debt = $180,000,000.00 Market Value of Equity = $20,172,201,961.04 Value of Equity options issued by the company = $52,000,000.00 Market Value of Equity/share = $73.29

Market Value at an estimated growth rate of 25%:

Market Value at an estimated growth rate of 25% Present Value of FCFF in high growth phase = $ 4,627,111,697.12 Present Value of Terminal Value of Firm = $ 8,458,660,426.31 Value of the firm = $ 13,085,772,123.43 Cash and Marketable Securities = $ 688,000,000.00 Market Value of outstanding debt = $ 180,000,000.00 Market Value of Equity = $ 13,593,772,123.43 Value of Equity options issued by the company = $ 52,000,000.00 Market Value of Equity/share = $ 49.33 Firm is overvalued

Competitive Landscape:

Competitive Landscape Infosys Technologies (INFY) Competitors: Wipro (WIT) HCL Technologies Ltd. Satyam Computer Services (SAY) Cognizant Technology Solutions Corp. Syntel Inc. Tata Consultancy Services Ltd. i-flex Patni Computer Systems Ltd.

Comparable company analysis:

Comparable company analysis Share Price Ticker Company name Share Price* % of 52 week high Equity market cap (2) Book value Cash and Symbol Indian IT Services vendors equivalents ($/shr) (%) ($MM) ($MM) ($MM) INFY Infosys Technologies (INFY) $75.10 90.1% $20,616.8 $1,639.0 $969.0 WIT Wipro (WIT) $14.50 93.6% $20,649.3 $1,574.6 $773.8 629489 HCL Technologies Ltd. $13.47 85.0% $4,335.6 $840.8 $441.8 SAY Satyam Computer Services (SAY) $38.71 87.0% $6,268.4 $914.8 $472.0 *Share price as per 4/10/2006 (2) Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market capitalization plus total debt and other value, less cash and equivalents.

Comparable company analysis:

Comparable company analysis Company name Cash % Total Debt Enterprise Revenue EBITDA Indian IT Services vendors of market cap Value (2) FY 07 FY 08 CY 06 CY 07 (%) ($MM) ($MM) ($MM) ($MM) ($MM) ($MM) Infosys Technologies (INFY) 4.7% $0.0 $19,660.8 $2,622.5 $3,320.0 $846.7 $1,055.9 Wipro (WIT) 3.7% $32.3 $19,907.8 $2,886.8 $3,613.7 $689.0 $841.3 HCL Technologies Ltd. 10.2% $41.2 $3,937.5 $1,117.8 $1,418.0 $255.4 $319.1 Satyam Computer Services (SAY) 7.5% $16.9 $5,834.2 $1,343.6 $1,703.2 $300.1 $377.8 (2) Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market capitalization plus total debt and other value, less cash and equivalents.

Comparable company analysis:

Comparable company analysis Company name Enterprise Value/Revenue Enterprise Value/EBITDA Indian IT Services vendors FY 07 FY 08 FY 07 FY 08 (x) (x) (x) (x) Infosys Technologies (INFY) 7.5 x 5.9 x 23.2 x 18.6 x Wipro (WIT) 6.9 x 5.5 x 28.9 x 23.7 x HCL Technologies Ltd. 3.5 x 2.8 x 15.4 x 12.3 x Satyam Computer Services (SAY) 4.3 x 3.4 x 19.4 x 15.4 x

Comparable company analysis:

Comparable company analysis Company name Earnings per share Price/Earnings Long-term PEG ratio Indian IT Services vendors FY 07 FY 08 FY 07 FY 08 Growth rate FY 07 FY 08 ($/shr) ($/shr) (x) (x) (%) (x) (x) Infosys Technologies (INFY) $2.38 $2.87 31.6 x 26.2 x 29.4% 1.1 x 0.9 x Wipro (WIT) $0.38 $0.46 37.9 x 31.6 x 23.4% 1.6 x 1.4 x HCL Technologies Ltd. $0.54 $0.62 25.2 x 21.6 x NA NA NA Satyam Computer Services (SAY) $1.54 $1.85 25.2 x 20.9 x 21.5% 1.2 x 1.0 x

Recommendation: Buy at low :

Recommendation: Buy at low

Thank you!:

Thank you!

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