2023-06-28 13:05:32 ET
Summary
- Infosys provides a wide range of business, IT and other consulting and advisory services to organizations worldwide.
- Management has guided to only moderate revenue growth in fiscal 2024 and faces client delays, deferrals and slower decision-making as macroeconomic uncertainties increase.
- Until we see better signals from management and from client behavior, I'm Neutral [Hold] for INFY.
A Quick Take On Infosys
Infosys Limited ( INFY ) reported its FQ4 2023 financial results on April 13, 2023, missing both revenue and EPS consensus estimates.
The firm provides an array of consulting, advisory and related services to companies worldwide.
Given management’s cautious forward guidance and slowing macroeconomic forces increasing project cancellations and deferrals, my outlook for INFY in the near term is Neutral [Hold].
Infosys Overview
Bengaluru, India-based Infosys was founded in 1981 to provide consulting, outsourcing and information technology services to companies globally.
The firm is headed by Chief Executive Officer Salil Parekh, who was previously in leadership roles at consulting firm Capgemini and, prior to that, a partner at Ernst & Young.
The company’s primary offerings include the following:
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Consulting
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Technology development
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Outsourcing
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Digital services
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Others
INFY acquires customers through its direct sales, marketing and business development efforts, as well as through partner referrals and channels.
INFY’s Market & Competition
According to a 2021 market research report by 360 Market Updates, the global market for digital transformation strategy consulting was an estimated $58.2 billion in 2019 and is forecast to reach $143 billion by 2025.
This represents a forecast CAGR of 16.2% from 2020 to 2025.
The main drivers for this expected growth are a large transition from on-premises, legacy systems to cloud-based environments with complex architectures.
Also, the COVID-19 pandemic has likely pulled forward significant demand to modernize enterprise systems resulting in increased growth prospects for digital transformation consultancies.
Major competitive or other industry participants include the following:
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Globant (GLOB)
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EPAM (EPAM)
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Slalom
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Accenture (ACN)
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Deloitte Digital
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McKinsey
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BCG
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Ideo
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Cognizant Technology Solutions (CTSH)
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Capgemini (CAPMF)
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Company in-house development efforts
The firm is active in other consulting and advisory markets worldwide.
INFY’s Recent Financial Trends
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Total revenue by quarter has risen in recent quarters; Operating income by quarter has essentially flatlined, as the chart shows below:
Total Revenue and Operating Income (Seeking Alpha)
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Gross profit margin by quarter has trended lower in recent quarters; Selling, G&A expenses as a percentage of total revenue by quarter have produced no discernible trend:
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
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Earnings per share (Diluted) have trended higher in recent quarters:
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, INFY’s stock price has fallen 16.07% vs. that of Wipro’s ( WIT ) drop of 12.92%, as the chart indicates below.
For the balance sheet, the firm ended the quarter with $2.3 billion in cash, equivalents and short-term investments with no debt.
Over the trailing twelve months, free cash flow was $2.5 billion, during which capital expenditures were $319 million. The company paid $64.0 million in stock-based compensation in the last four quarters, the highest rolling twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For Infosys
Below is a table of relevant capitalization and valuation figures for the company.
Measure [TTM] | Amount |
Enterprise Value / Sales | 3.5 |
Enterprise Value / EBITDA | 15.0 |
Price / Sales | 3.5 |
Revenue Growth Rate | 11.7% |
Net Income Margin | 16.4% |
EBITDA % | 23.1% |
Net Debt To Annual EBITDA | -0.6 |
Market Capitalization | $64,110,000,000 |
Enterprise Value | $62,850,000,000 |
Operating Cash Flow | $2,850,000,000 |
Earnings Per Share (Fully Diluted) | $0.71 |
(Source - Seeking Alpha)
Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings.
Assuming generous DCF parameters, the firm’s shares would be valued at approximately $12.37 versus the current price of $15.62, indicating they are potentially currently somewhat overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.
As a reference, a relevant partial public comparable would be Wipro ((WIT)); shown below is a comparison of their primary valuation metrics.
Metric [TTM] | Wipro | Infosys | Variance |
Enterprise Value / Sales | 2.1 | 3.5 | 66.7% |
Enterprise Value / EBITDA | 11.6 | 15.0 | 29.3% |
Revenue Growth Rate | 14.4% | 11.7% | -19.2% |
Net Income Margin | 12.5% | 16.4% | 30.5% |
Operating Cash Flow | $1,590,000,000 | $2,850,000,000 | 79.2% |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
INFY’s most recent Rule of 40 calculation was 34.7% as of FQ4 2023’s results, so the firm has performed reasonably well in this regard, per the table below.
Rule of 40 Performance | FQ4 2023 |
Revenue Growth % | 11.7% |
EBITDA % | 23.1% |
Total | 34.7% |
(Source - Seeking Alpha)
Commentary On Infosys
In its last earnings call (Source - Seeking Alpha), covering FQ4 2023’s results, management highlighted the slowdown in client activity through ‘unplanned project ramp-downs…and delays in decision-making.’
I’m seeing this dynamic across consulting firm activity, but it also is concentrated among certain industry verticals, which management indicated was ‘financial services, in mortgages, asset management, investment banking, telecom, hi-tech and retail.’
Notably, at least for INFY, it is seeing a greater negative impact in the U.S. versus Europe.
Management plans to focus on the integration of generative AI into its service offerings as well as internally to increase its efficiency.
Management did not disclose any company, customer or employee retention rate metrics, although it did say that its client ‘attrition continued to decline in each of the quarters through the year.’
Total revenue for FQ4 2023 rose 6.4% year-over-year and gross profit margin dropped by 0.5 percentage points.
Selling, G&A expenses as a percentage of revenue were flat YoY, while operating income increased by 4.1%.
Looking ahead, management guided revenue growth for the full fiscal year to 5.5% at the midpoint of the range and operating margin to be 21% at the midpoint.
The company's financial position is quite robust, with large liquidity, no debt and impressive free cash flow.
INFY’s Rule of 40 performance has been relatively strong, although in need of some improvement.
From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.
Earnings Transcript Key Terms Frequency (Seeking Alpha)
I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited ‘Uncertain’ twelve times, ‘Macro’ six times, ‘Drop’ three times and ‘Volatil[e][ity]’ two times.
The negative terms refer to the difficult environment for IT services companies, as customers cancel or delay projects due to macroeconomic uncertainties.
Analysts questioned company leadership about a return to pre-pandemic growth rates in its forward guidance beyond the current year.
While management would not comment specifically beyond the current fiscal year, it did reiterate that it sees growth opportunities in digital transformation and cost-efficiency generation.
Regarding valuation, my discounted cash flow calculation suggests the stock may be overvalued at its current level and growth assumptions.
Given management’s cautious forward guidance and slowing macroeconomic forces increasing project cancellations and deferrals, my outlook for INFY in the near term is Neutral [Hold].
For further details see:
Infosys Guides To Moderate Growth Amid Client Challenges