7/14/2021 Infosys Fundamental Analysis and Future Outlook - Billion Dollar Valuation

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Infosys Fundamental Analysis and Future

Outlook
 by Aaron Patrick  June 13, 2020

Infosys is an Indian multinational corporation that provides business

consulting, information technology and outsourcing services. From the initial
capital of $ 250, the company has grown to become a $ 35 billion business in
nearly 4 decades. Infosys is a global leader in next-generation digital services
and consulting. The company also has strategic partnerships with other big
technology companies and has established 13 subsidiaries across the world.
The company’s shares have 52 weeks high of INR 847 and a total market
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7/14/2021 Infosys Fundamental Analysis and Future Outlook - Billion Dollar Valuation

capitalization of INR 2.7 trillion which makes it a Large-Cap company. The shares
have a P/E ratio of 16.7 and a dividend yield of 2.91%

Now, Now, let’s take a deep dive into the fundamentals of the company.

The company will be evaluated on 10 parameters and each would be given a rating
out of 5 stars. From this, we will arrive at a combined stock rating for the company.
As the ratings are based on long term past performance, they are relevant for at
least 3 years in the future until FY 2022. The parameters are as follows.

1. Economic Moat

2. Business Model and Management

3. Growth Ratios

4. Profitability Ratios

5. Cash Flow Ratios

6. Liquidity and Solvency Ratios

7.Efficiency Ratios

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8. Valuation Ratios

9. ROE (Du Pont Analysis)

10. Future Prospects

(All units are USD Millions except ratios and per share data)

You can get the complete excel model used for this
analysis from below:

 Infosys Shares Complete Fundamental Analysis

Fundamental Analysis in Microsoft Excel of Infosys Shares

infosys infosys shares infosys income statement

1.Economic Moat (★ ★ ★ ★ ☆)

The company operates in IT and technology industry where market dominance is

achieved through scale, technical know-how, digital infrastructure and workforce.
Infosys has a global presence in 46+ countries and provides digital services to
180+ fortune 500 companies across the world. The company’s clientele
includes 8 out of 10 top US banks, 6 out of top 10 global insurance companies

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and 9 out of top 10 global pharmaceutical companies. Infosys also has a 5G lab
in Syndey and a Cyber defence centre in Romania.

On the technical know-how front, the company is an innovation leader in automation,

digital transformation, agile and big data. The company also has 8 Innovation
Hubs across US and EU along with 9 global digital studios. On the workforce
front, the company has 2.42+ lakh employees and is focused on the
localization of its workforce. They also have 60,000+ employees deployed in
digital business which includes chatbots, AI, apps and platforms. Overall the
company has a wide economic moat due to its scale, market presence,
innovation and workforce but it is still not a monopoly. Therefore this category
gets 4 stars in Infosys shares fundamental analysis.

2. Business Model and Management (★ ★ ★ ★ ★)

The business model is such that 31.3% of the revenue comes from the
financial services industry, 15.5% from Retail, 13% from communications, 10%
from manufacturing, 7.9% comes from Hi-tech and the remaining from life
sciences and others. The geographical distribution is such that 61.6% comes
from North America, 24.4% comes from Europe, 2.6% comes from India and
11.4% comes from other 20+ countries in the world.

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The strategy of the company is to grow through 4 principles which include Scale
Agile Digital (Invest in digital capabilities and priority services), Energize the Core
(Infuse AI and Automation), Expand Skilling (Re-skill talent pool) and drive
localization (Hire locally in markets, local training and delivery). The company is
also expanding through inorganic means which includes acquisitions of
Brillant Basics, fluido and simplus along with Joint Ventures with Temasek,
Hitachi, Panasonic and ABN AMRO. Overall the business model is well
diversified and the focus is on core growth.

Mr Salil Parekh is the CEO and MD of the company. Earlier he was a member
of the Group Executive Board at Capgemini, where he held several leadership
positions for 25 years. He was recently accused of bypassing reviews and
approvals to get bigger deals along with not recognizing full costs and hiding
critical information from auditors. However, the company has 87% of the public
shareholding and 63% independent directors, which gives it good corporate
governance. Therefore this category gets 5 stars in Infosys shares fundamental
analysis.

3. Growth Ratios (★ ★ ★ ★ ★)

The revenue has shown a growth of 10.5% CAGR over the last 10 years.  The
operating income and net income has also grown at 7.21% and 5.9% CAGR
respectively. This shows declining efficiency and profitability for the company.
The working capital is also positive and has shown a linear growth.  Capital
expenditure has remained flat even with an increased scale. Therefore this category
gets 5 stars in Infosys shares fundamental analysis.

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4. Profitability Ratios (★ ★ ★ ★ ☆)

The gross margin has been declining over the years due to wage inflation and
increased cost of services delivered. The other margins along with return on
assets have declined. This is a nature of IT business where certain
unavoidable costs increase with scale. Overall the company has seen reduced
profitability over the years which is not likely to improve in the future.
Therefore this category gets 4 stars in Infosys shares fundamental analysis.

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7/14/2021 Infosys Fundamental Analysis and Future Outlook - Billion Dollar Valuation

5. Cash Flow Ratios (★ ★ ★ ★ ★)

The net income margin has seen a slight decline over the years along with the Cap-
Ex as a percentage of sales. This also shows that growth is driven majorly by
inorganic means through JVs and acquisitions.  The free cash flow as a
percentage of net income has been positive and stable over the years. The
free and operating cash flow growth has been fluctuating but this is the nature
of the business. Overall the company has shown a solid cashflow position.
Therefore this category gets 5 stars in Infosys shares fundamental analysis.

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7/14/2021 Infosys Fundamental Analysis and Future Outlook - Billion Dollar Valuation

6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)

The company does not have any debt in its capital structure therefore the financial
leverage and debt to equity ratio has been flat over the years. The profitability
margins have declined over the years, but this, however, is not a significant
concern to the solvency of the company. The current and quick ratio has
declined over the years but is still way above the minimum threshold which
shows a good liquidity position. Therefore this category gets 5 stars in Infosys
shares fundamental analysis.
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7. Efficiency Ratios (★ ★ ★ ★ ☆)

The table in the excel model is colour formatted so the worst performance over the
period is highlighted in red colour and the best performance is highlighted by green.

Overall the business efficiency has not seen any significant changes over the years
and this is because of the nature of the business. The payables period has
increased from 1 to 10 days and the receivables days have almost remained
stable due to the nature of contracts. The cash conversion cycle has only
seen a small decline from 68 days to 59 days and it is still positive. Therefore
this category gets 4 stars in Infosys shares fundamental analysis.

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8. Valuation Ratios (★ ★ ★ ★ ☆)

The company traded at a higher valuation since the 2013 period due to the bull rally
in the Indian IT sector which was led by the digitalization of the finance industry.
That year TCS gained 60% and HCL was up by 70%. The company has managed
to sustain the multiples over the years due to prudent cash generation and
deployment along with expansion into new businesses. The multiples,
however, are likely to remain flat in the coming years. Therefore this category
gets 4 stars in Infosys shares fundamental analysis.

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7/14/2021 Infosys Fundamental Analysis and Future Outlook - Billion Dollar Valuation

9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ★)

The leverage ratio along with asset turnover has seen a slight increase in the recent
years. The interest burden ratio has remained at 100% due to no interest-
bearing debt in the capital structure of the company. The operating margin has
seen a slight decline and the tax efficiency has improved. Overall the Return
on Equity has been stable even with declining profitability due to improving
asset turnover. Therefore this category gets 5 stars in Infosys shares fundamental
analysis.

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10. Future Prospects (★ ★ ★ ★ ★)

Some insights for the coming years from management discussion & analysis
(MD&A) and con calls are as follows.

The revenue guidance for FY 2020 was matched with Q4 results coming in.
However, the management said considering business uncertainty emanating
from Covid-19, it is unable to provide guidance on revenues and margins for FY
2021 at this stage. It will provide guidance once visibility improves.
Whistleblower issue is now almost resolved. The Investigation found no
evidence of any wrongdoing by the company or the management.
Accordingly, the company sees no necessity of restating past financial
statements. While SEC investigation and a class-action lawsuit in the US
on this matter are still ongoing, the company is working in full co-
operation with all the regulators.
Slow organic growth in BFSI segment continues due to higher-than-normal
furloughs. Growth in European banks remains soft and remains healthy in North
America. Softness is expected to continue for a few more quarters, although
large deal wins are still led by BFSI.
Management focus is on margin improvement. In FY 2020 Margin was
impacted by: currency (+10bp), cost optimization (+50 bp) and a dip in
utilization (-40bp). Cost optimization has been giving results as the

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7/14/2021 Infosys Fundamental Analysis and Future Outlook - Billion Dollar Valuation

company works automation, pyramid rationalization and onsite-offshore

mix.

Overall the company has solid fundamentals, prudent cash allocation and
good growth prospects in the coming future. The margins are also expected to
improve along with efficiency in the coming years. Therefore this category gets
5 stars in Infosys shares fundamental analysis.

The overall rating is arrived by taking the average of the above 10 category ratings
and rounded up if it is above 0.5 and rounded down if it is below 0.5.

Overall Fundamental Rating:

INFOSYS SHARES (4.6/5)

Therefore it is a 5-star stock

★★★★★

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7/14/2021 Infosys Fundamental Analysis and Future Outlook - Billion Dollar Valuation

Infosys Shares

Economic Moat ★★★★☆

Business & Management ★★★★★

Growth Ratios ★★★★★

Profitability Ratios ★★★★☆

Cash Flow Ratios ★★★★★

Liquidity & Solvency ★★★★★

Efficiency Ratios ★★★★☆

Valuation Ratios ★★★★☆

ROE (Du Pont Analysis) ★★★★★

Future Prospects ★★★★★

Overall Fundamental Rating ★★★★★

Infosys Fundamental Analysis

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7/14/2021 Infosys Fundamental Analysis and Future Outlook - Billion Dollar Valuation

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Analysis Guide

(Note: All the research done by me is only for educational purposes and should not
be seen as Investment recommendations. I am a Research analyst and not a SEBI
registered Investment Advisor. My research completely reflects my personal
opinions and not of my employers. Kindly do your own due diligence before
Investing)

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