INFY NIFTY - Narnolia · 26-Oct-17 Key Highlights of the Report: 52wk Range H/L Mkt Capital (Rs Cr) Av. Volume (,000) Financials/Valu ation FY15 FY16 FY17 FY18E FY19E

26-Oct-17

Key Highlights of the Report:

52wk Range H/L

Mkt Capital (Rs Cr)

Av. Volume (,000)

Financials/Valu

ation

FY15 FY16 FY17 FY18E FY19ENet Sales 53,319 62,441 68,485 70,148 73,954

EBITDA 14,871 17,120 18,605 18,610 19,802

EBIT 17,284 18,982 19,981 19,805 20,149

PAT 12,372 13,678 14,353 14,362 14,709

2QFY18 1QFY18 4QFY17 EPS (Rs) 108 60 63 66 68

Promoters 12.8 12.8 12.8 EPS growth (%) -42% -45% 5% 5% 2%

Public 86.8 86.8 86.8 ROE (%) 26 24 22 22 22

Others 0.5 0.5 0.5 ROCE (%) 29 28 26 25 26

Total 100.0 100.0 100.0 BV 444 253 302 293 330

P/B (X) 5.0 4.8 3.4 3.2 2.8

1Mn 3Mn 1Yr P/E (x) 20 20 16 14 14

Absolute 3.2 -5.6 -9.8

Rel.to Nifty -1.1 -8.9 -28.1

NIHARIKA OJHA

Narnolia Securities Ltd

IT SOFTWARE

BSE Code - 500209

NSE Code - INFOSYS

BLOOMBERG INFO IN

Target Price 1015

CMP 935

INDUSTRY -

NEUTRALNIFTY - 10295

Demand for new services: In this growing era where there is huge

demand for new services and make them hugely grow very fast and

provide the growth for the future is a big challenge for IT companies.

Infosys ‘s strategy has been progressing well with 9.4% contribution from

new services (Cloud Ecosystem, Big Data and Analytics, API and Micro

Services, Data and Mainframe Modernization, Cyber

Upside 9%

1045/861

2,14,861

297

We maintain NEUTRAL on the stock with target price of Rs1015.

Capital allocation policy :In capital allocation policy several steps were

taken during the quarter the board approved the buyback of equity shares

of the company amounting to INR 13,000 crores, approximately

US$2billionhe.The company also announced an interim dividend of INR

13 per share, approximately $0.20 per ADS as compared to an interim

dividend of INR 11 per share announced last year.

Challenges faced by management : In this growing era where there is

huge demand for new services and make them hugely grow very fast and

provide the growth for the future is a big challenge for IT companies .

Integration software platform or software product :The management is

seeing big opportunity combining the products and service platforms to

solve the problems for clients demand.

[email protected]

DEEPAK [email protected]

RoE to remain stable

Recent Development :Strategies and challenges under nilekani

The management went through strategy refresh to understand exactly

what need to done,whether they are doing all the right things, whether

ther is need for change the strategy.

Company Data

Stock Performance %

Shareholding patterns %

80

85

90

95

100

105

110

115

120 INFY NIFTY

mailto:[email protected]

Financials 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 YoY % QoQ% FY16 FY17 YoY %

Net Sales / Income from

Operations

17,310 17,273 17,120 17,078 17,567 1.5% 3% 62,441 68,485 10%

Other Income 760 820 746 814 883 16% 8% 3,128 3,079 -2%

Employee Benefit

Expenses

9,648 9,420 9,309 9,366 9,604 0% 3% 34,418 37,659 9%

Other Expenses 787 838 823 752 800 2% 6% 2,497 3,273 31%

EBITDA 4,733 4,767 4,658 4,561 4,702 -1% 3% 17,120 18,605 9%

Dep and Amortisation

expense

424 433 446 450 456 8% 1% 1,266 1,703 35%

EBIT 4,309 4,334 4,212 4,111 4,246 -1% 3% 15,854 16,902 7%

Interest - - - - - - -

PROFIT BEFORE TAX 5,069 5,154 4,958 4,925 5,129 1% 4% 18,982 19,981 5%

Tax 1,460 1,446 1,330 1,371 1,403 -4% 2% 5,301 5,598 6%

Exceptional Items - - - 71 - -100% - -

PROFIT AFTER TAX 3,606 3,708 3,603 3,483 3,726 3% 7% 13,678 14,353 5%


Quarterly Performance

EBITDA and GROWTH trend Revenue from Operation trend

2QFY18: Strong beat on net profit growth

Infosys 2QFY18 revenues grew 3%QoQ, significantly above our estimate of 2% QoQ. Reported

revenue growth was 17567 cr as compared to 17078 cr in 1QFY18(3% QOQ and 1%YOY). For the

first time more than half of Infosys revenues came from fixed-price projects allowing the firm

flexibility to deploy resources.

Volumes grew 1.6% QoQ as compared to Q2 of last year, volume growth was 4.7%.

Pricing realization on a sequential basis improved by 1.3% in reported terms and 0.7% in constant

currency terms. On a year-over-year basis for H1 of this year as compared to H1 of last year, which

is a flattish.

Utilization excluding trainees increased further to an all-time high of 84.7% as compared to 82.5%

in Q2 of last year. Utilization has been consistently above 80% for the last 10 quarters in a row.

0%

5%

10%

15%

20%

25%

30%

16200

16400

16600

16800

17000

17200

17400

17600

17800

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

Revenue Growth %(YOY)

-5%

0%

5%

10%

15%

20%

25%

4200

4300

4400

4500

4600

4700

4800

1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

EBITDA Growth %(YOY)

PAT and PAT Growth trend Ultisation including & excluding trainee

EBIT margin improved 10bp QoQ to 24.2% vs 24.1%in 1QFY18 . Margin improvement

resulting out of employee productivity, improvement in attrition and utilizations as well

as increased business from fixed-price projects giving the firm more leeway in

deploying resources but were partly offset by higher compensation costs due to

compensation review and higher variable pay.

Net profit grew 3.2 per cent to Rs 3,726 crore. Net margin improved to 21.2 per cent

on the back of higher use of employees and shifting of more work to offshore

Infosys divulge its revenue from new services and software launched from 1April 2015.


Infosys ‘s strategy has been progressing well with 9.4% contribution from new

services (Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Data and

Mainframe Modernization, Cyber

The platform has been leveraged across diverse business solutions, including loan on

boarding, fraud management, demand sensing, predictive costing, contract

compliance and procurement automation

The company has 200 engagements and see tremendous potential for the platform

and business solutions going forward

New software (Edge, NIA, Panaya and Skava) contributed to 1.6% of total revenue.

Digital revenue constitutes 11% of total revenue

New services and products drove much of incremental growth

Deal wins improved

5 large deals with a TCV of $731 million, both the TCV of deal wins and share of new

deals improved over the period. For software-led offerings ,Infosys NIA, AI and

automation platform continued its positive momentum driving several deal wins.

76.6 76.375.1 75.5

77.278.4 78.5 78.8

80.880.982 81.4 80.8 81.1

83.1 82.4 82.684.5

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18

Utilization Incl. Trainees Utilization Excl. Trainees

Revenue by industry (IN

CR)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

Banking and Financial

Services

3882 4243 4377 4522 4551 4686 4663 4655 4594 4718

Manufacturing 1616 1827 1756 1748 1844 1853 1893 1918 1863 1916

Energy & Utilities,

Communication &

3166 3336 3410 3635 3719 3864 3885 3963 3957 4122

Retail & CPG 2342 2582 2576 2727 2861 2833 2821 2710 2695 2742

Life Sciences , Healthcare

and Insurance

1870 2036 2102 2083 2004 2089 2196 2148 2170 2301

Hi-Tech 1151 1214 1198 1327 1322 1339 1250 1211 1235 1254

Others 327 397 483 508 481 646 565 515 564 514

Total 14354 15635 15902 16550 16782 17310 17273 17120 17078 17567

Segment Performance: BFSI to remain Sanguine, challenges in Retail

Geography Performance

Growth across geographies was dominated by Europe which grew by 6.6% sequentially and 4.1% in

constant currency. This was followed by Rest of the world grew by 2.9% sequentially and 2.3% in

constant. Growth in North America grew by 2.0% sequentially and 1.9% in constant currency and India

declined by 5.2% sequentially which was lower than that of company average.

Strong growth were seen in verticals like Energy and Utilities, Life Sciences, Transportation and

Logistics. Financial Services growth was in line with the expectation. BFSI grew 3% QOQ.

Manufacturing vertical is seeing some in-sourcing and cost optimization initiatives by a few clients.

There is some pickup in activity in ERP space, driven by M&A in the sector in the last 12 to 18 months.

High-tech companies are changing their business models to capture new sources of revenue.But still

in Retail and CPG, non-discretionary spend are being impacted due to slowing growth leading to cost

pressures. On discretionary spend and new technology adoption there is growing interest to embrace

digital AI, RPA, analytics, et cetera. Telecom is seeing significant industry consolidation to achieve

diversified product offerings and monetize the network traffic in a better way.


North America

61%

Europe23%

India3%

Row13%

North America, 60.

6

Europe, 23.2

India, 3.3 Row, 12.9

Infosys guided for 5.5-6.5% YoY CC growth in FY18E, against ealier expectation of 6.5%- 8.5% guidance

Revenues grew 5.7% in H1 this year as compared to H1 of last year, the net head count declined by

0.7% during the same period. This is primarily on account of lower net head count addition due to

higher utilization and productivity improvements. The quarter ended with a total head count of 198,440,

which is a decrease of 113 from last quarter. During H1 of this year, the net head count decreased by

1,224 employees as compared to a net addition of 5,785 employees in H1 of last year.

Efforts towards moderation in onsite mix has led to onsite mix decreasing to 29.4% in Q2 which is the

lowest level in the last eight quarters. Onsite mix stood at 30.1% last quarter. The company focus on

optimizing onsite employee cost, including a sharper focus on productivity, onsite pyramid and other

cost optimization measures led to a decrease in employee cost as a percentage of revenue from

54.4% in Q2 this year from 55.4% in Q2 last year a drop of 1%.

Focus on optimizing onsite

Declining headcount in 2QFY18

The company also announced an interim dividend of INR 13 per share, approximately $0.20 per ADS

as compared to an interim dividend of INR 11 per share announced last year. As announced earlier,

the record date for both buyback and interim dividend is November 1, 2017.


Revised Guidance for FY18

This means that the marginally lower guidance is an adjustment for the 1HFY18 revenue miss.

Owingto a weak beginning for FY18, factoring in uncertainty in the macroeconomic environment and

the decline in small pockets like Finacle

Post 2QFY18, Infosys narrowed its guidance range to5.5-6.5% YoY CC. This implies 3QFY18&

4QFY18 CC revenue growth will be soften than expected.

Capital allocation policy

In capital allocation policy several steps were taken during the quarter the board approved the

buyback of equity shares of the company amounting to INR 13,000 crores, approximately US$2billion.

Shareholder approval for the buyback of equity shares was obtained through a postal ballot and a

public announcement was made on October 10, 2017 on buyback of equity shares. Draft Letter of

Offer for the buyback has been filed with the regulators for their comments.

Revised revenue guidance:Based on current performance in first half of the year and seasonal

softness that is typically seen in H2, revenue guidance has revised to 5.5% to 6.5% in constant

currency terms.

View and Valuation

Infosys has been undergoing financial performance pressure, shareholders' expectations pressure,

Peer Pressure and now Management pressure. Vishal Sikka's resignation we believe has been one of

the major pivot point for Infosys. Businesses are not built in days but it is management's strategy that

works over years that build up a company. And, this continuous management rejig at the top certainly

will come with a cost. Recent quarterly results and the much expected earnings guidance cut do not

fill us up with enough confidence for growth in near future. Amidst all this negativity, we still should

not forget that though there is muted growth but still Infosys is a company which produces Rs

14000Cr profits which in itself is no less. However, We feel that till the ripples over management do

not settle, we have a Neutral view on the stock. We value Infosys at 15times Fy19E EPS ( after

factoring the Rs13000 Cr Buy Back).

We maintain NEUTRAL on the stock with target price of Rs1015.

Sanguine toward Financial Services:Financial Services growth in 2QFY18 was in line with the

expectation. Expected to see seasonal softness Q3, driven by furloughs and spending cuts. On a

mid-longer term basis the management remain optimistic about tech spend in BFSI and large deal

wins.


Broad-based improvement in operational efficiency parameters: utilization excluding trainees

increased to an all-time high of 84.7% as compared to 82.5% in Q2 of last year. You would recall that

the utilization has been consistently above 80% for the last 10 quarters in a row.onsite pyramid and

other cost optimization measures led to a decrease in employee cost as a percentage of revenue

from 54.4% in Q2 this year from 55.4% in 2QFY17

Capital allocation policy :In capital allocation policy several steps were taken during the quarter the

board approved the buyback of equity shares of the company amounting to INR 13,000 crores,

approximately US$2billionhe.The company also announced an interim dividend of INR 13 per share,

approximately $0.20 per ADS as compared to an interim dividend of INR 11 per share announced last

year.

Deals wins:During the quarter five large deals with a TCV of $731 million, both the TCV deal wins

and share of new deals improved over quarter one 2018. For software-led offerings Infosys NIA, AI

and automation platform continued its positive momentum driving several deal wins. The

management is working with more than 100 clients on close to 200 engagements and see

tremendous potential for the platform and business solutions going forward.

Highlights of Concall

By Geography (%) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

North America 63 63 63 62 62 62 62 62 61 61

Europe 22 23 23 23 23 23 22 22 22 23

India 2 2 3 3 3 3 3 3 4 3

Rest of the world 12 12 12 12 12 13 12 12 13 13

Revenues by Client

Industry(in %)


Banking & Financial

Services, Insurance

33 33 34 33 33 33 33 34 33 33

Manufacturing & Hi-Tech 24 24 23 23 23 23 23 22 22 22

Retail & Life Sciences 24 25 24 25 24 24 24 23 23 23

Energy, Utilities,

Communications &

19 19 19 20 20 21 21 21 22 22

Revenues by Service

Offering


Business IT Services 62 62 61 62 62 63 62 62 62 62

Application Development 14 14 14 14 14 16 16 15 15 16

Application Maintenance 20 20 19 20 20 18 17 17 17 16

Infrastructure

Management Services

8 9 8 8 8 8 9 9 8 9

Testing Services 9 9 9 9 9 9 9 9 9 9

Product Engineering

Services

4 3 3 3 4 4 4 4 4 4

Business Process

Management

5 5 5 5 5 5 5 5 5 5

Others 3 3 3 3 3 3 3 3 3 3

Consulting,Package Imp 33 33 34 33 32 32 32 33 33 33

Products& Platforms 5 5 5 5 6 5 6 6 5 5

Products 3 3 3 3 3 3 3 3 0 0

Platforms 1 1 2 2 2 2 2 2 0 0

Others 0 1 0 0 0 0 1 1 0 0

Client Data 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

Active 987 1,011 1,045 1,092 1,126 1,136 1,152 1,162 1,164 1,173

Added during the period

(gross)

79 82 75 89 95 78 77 71 59 72

Top client 4 4 4 4 4 4 3 3 3 3

Top 5 clients 14 14 14 14 14 13 12 12 - -

Top 10 clients 23 23 23 22 22 22 20 20 20 20

Utilization 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

Utilization Incl. Trainees 77 76 75 76 77 78 79 79 81 82

Utilization Excl. Trainees 81 82 81 81 81 83 82 83 85 85

Attrition 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18

Voluntary Attrition rate

(% LTM)

14 14 13 13 16 16 15 14 15 17

Operating Metrics


Income Statement Rs in Crores Key Ratios

Y/E March FY16 FY17E FY18E FY19E Y/E March FY16 FY17E FY18E FY19E

Revenue from Operation 62,441 68,485 70,148 73,954 ROE 24 22 22 22

Change (%) 17% 10% 2% 5% ROCE 28 26 25 26

Other Operating Income - - - - Asset Turnover 1 1 1 1

EBITDA 17,120 18,605 18,610 19,802 Current Ratio 4 4 3 4

Change (%) 15% 9% 0% 6% Debt/Equity - - - -

Margin (%) 27% 27% 27% 27% DPS 29 30 26 26

Depr & Amor. 1,266 1,703 1,732 2,053 Payable Days 2 2 2 2

EBIT 18,982 19,981 19,805 20,149 Debtor Days 66 66 66 66

Int. & other fin. Cost - - - - Earnings Per Share 60 63 66 68

Other Income 3,128 3,079 2,800 2,400 Book Value Per Share 253 302 293 330

EBT 18,982 19,981 19,805 20,149 P/E 20 16 14 14

Exp Item - - 71 - Price / Book Value 5 3 3 3

Tax 5,301 5,598 5,372 5,440 EV/EBITDA 14 11 10 9

Minority Int & P/L share of Ass. (3) (30) - - EV/Sales 4 3 3 2

Reported PAT 13,681 14,383 14,362 14,709 Div Payout% 0.49 0.48 0.39 0.38

Adjusted PAT 13,678 14,353 14,362 14,709 EPS GROWTH

Change (%) 11% 5% 0% 2%

Margin(%) 22% 21% 20% 20%

Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores

Y/E March FY16 FY17E FY18E FY19E Y/E March FY16 FY17E FY18E FY19E

Share Capital 1,144 1,144 1,088 1,088 PBT 13,489 14,353 19,805 20,149

Reserves 60,600 67,838 62,655 70,818 (inc)/Dec in Working Capital (1,946) (2,156) (276) (631)

Networth 61,744 68,982 63,743 71,906 Non Cash Op Exp 4,350 4,987 1,661 2,053

Debt - - - - Int Paid (+) - - - -

Other Non Cur Liab 367 360 360 360 Tax Paid (5,865) (5,653) (5,372) (5,440)

Total Capital Employed 62,111 69,342 64,103 72,266 others - - - -

Net Fixed Assets (incl CWIP) 10,582 11,892 13,230 14,321 CF from Op. Activities 10,028 11,531 15,819 16,131

Non Cur Investments 1,714 6,382 6,382 6,382 (inc)/Dec in FA & CWIP (2,723) (2,760) (3,197) (3,144)

Other Non Cur Asst 1,357 1,059 1,059 1,059 Free Cashflow 7,305 8,771 12,622 12,987

Non Curr Assets 20,526 22,209 23,547 24,638 others 1,822 (11,782) - -

Current investments 75 9,970 9,970 9,970 CF from Inv. Activities (901) (14,542) (3,197) (3,144)

Debtors 11,330 12,322 12,621 13,306 inc/(dec) in NW - - (13,000) -

Cash & Bank 32,697 22,625 15,398 21,465 inc/(dec) in Debt - - - -

Other Curr Assets 2,158 2,536 2,598 2,739 Int. Paid - - - -

Other financial assets 5,190 5,980 5,980 5,980 Div Paid (inc tax) (6,813) (6,939) (6,545) (6,545)

Short-term loans and advances 303 272 279 294 others - - - -

Curr Assets 51,753 53,705 46,845 53,753 CF from Fin. Activities (6,813) (6,939) (19,545) (6,545)

Creditors 386 367 376 396 Inc(Dec) in Cash 2,314 (9,950) (6,853) 6,442

Provisons 512 405 415 437 Add: Opening Balance 30,383 32,575 22,625 15,398

Other Curr Liab 2,629 3,007 3,080 3,247 Closing Balance 32,697 22,625 15,772 21,839

Other financial liabilities 6,302 6,349 6,349 6,349

Income tax liabities 3,410 3,885 3,885 3,885

Curr Liabilities 13,239 14,013 14,105 14,315

Net Curr Assets 38,514 39,692 32,740 39,438

Total Assets 75,350 83,355 77,833 85,832

Financials Snap Shot


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email: [email protected],

website : www.narnolia.com

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INFY NIFTY - Narnolia · 26-Oct-17 Key Highlights of the Report: 52wk Range H/L Mkt Capital (Rs Cr) Av. Volume (,000) Financials/Valu ation FY15 FY16 FY17 FY18E FY19E

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