Valuation by

Tanushree Seth

Company Snapshot
Global Headquarters: Bangalore, India

Founded: Global Presence:

1981 36 Sales Offices in 17 countries 37 Global Development Centers 49,422

Employees:

LTM Dec ·05 Revenue/ 5 Year CAGR: $2,014 million/ 41% LTM Dec ·05 Net Income/ 5 Year CAGR: $530 million/ 37%

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

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

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

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

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

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

Large. Expandable Addressable Market .

00 bn $728.00 bn Offshore benefits:  Deliver high quality at great value  Highly scalable with no foreseeable supply constraints  Proven track record  Addressable market has increased 300 200 100 0 CY 2004 CY 2007 .00 bn $51. enhance ROI  Improve competitiveness 800 700 600 500 400 $606.00 bn Corporate IT Services Spending Offshore Outsourcing IT Services Spending $18.Offshore Outsourcing is a Mega Trend Outsourcing benefits:  Convert fixed costs to variable  Reduce TCO.

2004 Canada China Ireland .India: #1 Offshore Destination Corporate Executives¶ Preferred Destinations for Offshore IT Services 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 80 70 60 50 40 30 20 10 0 India 80% 20% 17% 17% Source: Infosys: IDC Offshore Best Practices Enterprise Survey.

00 mm $2.00 mm Infosys Revenue 500 0 LTM Sep ' 00 LTM Sep '05 5 year CAGR (LTM Dec 00-LTM Dec 05) Global IT Services India IT Exports Infosys 5% 29% 41% Source: Infosys and Gartner 2004 .014.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 2500 2000 1500 1000 $294.

Business Model: Highly-evolved Global Delivery Model .

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

Infosys¶ Global Delivery Model Management Consulting 2005 ________ Business Process Management IT Outsourcing Systems Integration 2001 ________________ Technology Consulting Technology-enabled BPR Enterprise Solutions Application Development and Maintenance Software Engineering 1996 ______________ 1981 ____________ People|Organization|Infrastructure|Process|Quality Infosys Global Delivery Model .

Differentiation within the IT industry .

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 ³offshore-is-cost-center´ mindset Combat revenue cannibalization Provide seamless sales and delivery Reduce SG&A .

Client Budget 35% lowering total cost Significantly lower total cost of engagement Lower IT implementation cost = flexibility in solution delivery Greater ability to invest in managing business change -------| .Applying GDM to Consulting 100 90 80 70 60 50 40 30 20 10 0 Traditional INFOSYS Consulting consulting Model Business Change IT Implementation ----------------------------------------------------.

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

000 people across 7 cities in India Augmenting talent through new geographies China. Eastern Europe 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 Supplementing with experienced local hires Currently hiring people 59 nationalities .Scalable Execution Superior Talent Management: Hiring the Best Able to simultaneously evaluate 10.

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 (³GDC´) Ability to rapidly scale new engagements Flexibility to distribute engagements and capacity across centers worldwide .

Exceptional Financial Performance .

Superior Revenue Growth .

Sustained Industry-leading Profitability .

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 valueadd 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 .

000.000.00 $688.Valuation Inputs: Current EBIT = Current Interest Expense = Current Capital Spending Current Depreciation & Amortization = Tax Rate on Income = Current Revenues = Current Non-cash Working Capital = Chg.00 14.000.00 .000.00 $0.00 $186.000.000.66% $1. Working Capital = Cash and Marketable Securities Value of equity options issued by firm = Book Value of Debt = Book Value of Equity = $491.00 $52.00 $302.000.000.00 $1.000.000.000.000.000.000.000.304.00 $180.592.00 $66.00 $152.000.852.000.253.000.

03 4.63% 30% .000 10 years 2.Valuation Market Value per share= Number of shares outstanding= Market Value of Debt= Length of extraordinary growth period= Beta of the stock= Risk Free rate= Risk Premium= Cost of Debt= Estimated Growth= $75 274.530.000.60% 5.000 $180.86 6.

20% 11% 18.Valuation Outputs: Return on capital= Reinvestment Rate= Cost of Equity= Equity/(Debt+Equity)= After-tax Cost of debt= Debt/(Debt+Equity)= 27.14% .13% 4.87% WACC: 18.26% 99.80% 0.

167.000 $152.400 $120.000.Valuation Current EBIT * (1 ± tax rate) .(Capital Spending ± Depreciation) .096.019.304 .00 $419.Change in WC Current FCFF: $146.852.

00 $297.120.752.381.830.520.670.877.NPV of FCFF 2006 EBIT * (1 .83 $168.(CapEx-Depreciation) -Chg.096.084.198.563.856. Working Capital Free Cash flow to Firm $586.27 $416.657.22 $298.050.85 Present Value $252.00 $120.077.tax rate) .13 2007 $820.95 $234.318.88 .13 $167.061.490.212.895.

646.912.493.636.7 .396.200.74 $903.750.760.5 -Chg.8 2012 $4.595.123.7 $1.tax rate) $2.903.394.958.263.147.031.31 2013 $6.53 $1.75 $3.044.232.92 $1.499.631.511.699.586.294.610.NPV of FCFF 2010 EBIT * (1 .140.787.464.45 $586.971.93 .2 2011 $3.56 $695.773.19 $899.03 $1.817.899.141.245.391.6 Present Value $495.2 $2.447.258.265.58 $823.524.31 $645. Working Capital $461.282.952.661.048.(CapExDepreciation) $643.800.714.357.688.677.6 Free Cash flow to Firm $1.243.808.256.

13 2015 $12.569.00 $9.810.445.767.113.20 $0.237.611.125.981.854.(CapExDepreciation) -Chg.154.86 $2.349.40 $2.555.158.369.475.09 $3.07 $1.750.047.692.59 .91 Terminal Year $12.NPV of FCFF 2014 EBIT * (1 .587.966.135.752.090.052.177.19 $1.094.369.473. Working Capital Free Cash flow to Firm Present Value $8.396.38 $4.600.tax rate) .41 $974.675.970.149.031.392.49 $6.463.79 $3.633.

000.216.612.00 $20.04 $52.000.99 $19.000.000.961.NPV of FCFF Present Value of FCFF in high growth phase = Present Value of Terminal Value of Firm = Value of the firm = Cash and Marketable Securities = Market Value of outstanding debt = Market Value of Equity = Value of Equity options issued by the company = Market Value of Equity/share = $6.201.172.29 .052.05 $13.000.000.04 $688.961.664.00 $180.744.135.201.066.00 $73.

000.000.12 8.772.000.660.000.000.43 52.593.00 13.772.33 Firm is overvalued .31 13.43 688.426.123.458.697.00 180.111.627.Market Value at an estimated growth rate of 25% Present Value of FCFF in high growth phase = Present Value of Terminal Value of Firm = Value of the firm = Cash and Marketable Securities = Market Value of outstanding debt = Market Value of Equity = Value of Equity options issued by the company = Market Value of Equity/share = $ $ $ $ $ $ $ $ 4.00 49.085.000.123.

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

8 $20.616.6 $6. less cash and equivalents.1% 93. .0% 87. Satyam Computer Services (SAY) $75. warrants and convertible securities.8 $472.6 $840.71 (%) 90.3 $4.0% ($MM) $20.0 $773.47 $38.649.0 *Share price as per 4/10/2006 (2) Includes in-the-money outstanding options.10 $14.6% 85.8 $914.8 Share Price* % of 52 week high Equity market cap (2) Book value Cash and equivalents ($MM) $969.Share Price Comparable company analysis Ticker Symbol Company name Indian IT Services vendors ($/shr) INFY WIT 629489 SAY Infosys Technologies (INFY) Wipro (WIT) HCL Technologies Ltd.4 ($MM) $1.8 $441.574. treasury-adjusted.50 $13.639.0 $1.335. Enterprise value is market capitalization plus total debt and other value.268.

907.1 $377.320.703.5 $3.9 Wipro (WIT) 3.8 $1.8 $2.8 Includes in-the-money outstanding options.1 7. treasury-adjusted.418.622. warrants and convertible securities.2 $300.3 HCL Technologies Ltd.8 $3.2% $41.3 $19.834.0 $841.8 $2.7% $32.660. Enterprise value is market capitalization plus total debt and other value.7 $689.343.055.6 $1.937.Comparable company analysis Company name Cash % of market cap (%) ($MM) Total Debt Enterprise Revenue EBITDA Indian IT Services vendors Value (2) ($MM) FY 07 ($MM) FY 08 ($MM) CY 06 ($MM) CY 07 ($MM) Infosys Technologies (INFY) 4.2 $3.5 $1.0 $255.9 $5.5% $16.0 $846.7% $0.886.4 $319. Satyam Computer Services (SAY) (2) 10.0 $19.613.7 $1.117. less cash and equivalents. .2 $1.

3 x Satyam Computer Services (SAY) 4.5 x 2.4 x 15.2 x FY 08 (x) 18.4 x 12.7 x HCL Technologies Ltd. 3.3 x 3.4 x .9 x Enterprise Value/EBITDA FY 07 (x) 23.5 x 28.6 x Wipro (WIT) 6.5 x FY 08 (x) 5.9 x 5.9 x 23.Comparable company analysis Company name Indian IT Services vendors Enterprise Value/Revenue FY 07 (x) Infosys Technologies (INFY) 7.4 x 19.8 x 15.

38 $0. Satyam Computer Services (SAY) $0.9 x 25.6 x 26.6 x 23.54 $1.6 x 21.Comparable company analysis Company name Indian IT Services vendors Earnings per share FY 07 ($/shr) FY 08 ($/shr) Price/Earnings FY 07 (x) FY 08 (x) Long-term Growth rate (%) PEG FY 07 (x) ratio FY 08 (x) Infosys Technologies (INFY) $2.46 $0.2 x 29.5% 1.62 37.0 x .6 x NA 1.85 25.87 31.4 x NA $1.54 $0.1 x 0.38 $2.2 x 1.4% 1.4% NA 1.2 x 31.2 x 20.9 x Wipro (WIT) HCL Technologies Ltd.9 x 21.

Recommendation: Buy at low .

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