BUY SUHANI ADILABADKAR RESEARCH REPORT Q1 FY17

INFOSYS LTD QUARTERLY OUTLOOK & RECOMMENDATION INFOSYS, India’s second largest IT major with a market cap of Rs. 2371855 mn reported strong yearly numbers with PAT and Income from Operations rising 9% and 17% in Q1 FY17 compared to the same period previous year. Profit After Tax or Net Profit stood at Rs. 34570 mn quarter ended 30th June 2016 against Rs. 31650 mn corresponding June quarter 2015. EBDITA also had a healthy growth of 15% at Rs. 52000 mn in Q1 FY17 compared to Rs. 45160 mn in Q1 FY16. Business segments also grew in double digits with Retail & Logistics leading the pack at 22%, reported revenue of Rs. 28610 mn, followed by Financial Services and Energy & Utilities at Rs. 45510 mn and Rs. 37190 mn respectively growing at 17% YOY. Manufacturing and Hi Tech segment registered growth rate of 14% and 15% respectively in the current June quarter. But quarterly numbers tell a different story. Income from operations grew at a dismal rate of 1.4% where as EBDITA and PAT exhibited de-growth of 4% and 6% QOQ or compared to previous March quarter. Revenues grew 2.20% where as PAT de-grew by 4% QOQ in dollar terms. The attrition rate stands at 21% in the present quarter compared to 19.10% in previous March quarter. Poor quarterly numbers along with uncertain quarterly guidance has brought the stock to Rs. 1000 levels. The company is struggling to consolidate its position in the present volatile slow growth scenario especially in US & Europe which contribute 63% & 22% respectively of its revenues. Management commentary though cautious especially after RBS agreement termination is positive enough to counter any uncertain challenges especially in BFSI segment which contributes 33% of the total revenues and grew at dismal 0.64% QOQ. The BFSI sector may rebound with change in monetary policy stance in US with rise in interest rates and the global IT spending cannot remain low for a long time as faltering growth will be rectified sooner or later by governments all over the world. Infosys still remains the second largest IT company in India dependent on developed foreign markets and is facing challenges which are industry specific. Thus in the long term perspective, Infosys is available at mouth watering levels and is a definite BUY for medium and long term investment.

CMP

Rs. 1036.65

TARGET

Rs. 1220.00

SECTOR

BANKING

SCRIP CODE

500209

FACE VALUE

Rs. 5.00

MARKET Rs. 2371855 Mn CAP 52 WEEK Rs.1278.00/Rs.1009.20 HIGH/LOW SHAREHOLDING PATTERN (%) PROMOTER 12.75 PUBLIC 86.76 OTHERS 0.49 TOTAL 100 In Mn Q1 FY17 Q1 FY16 CHN% REVENUE 167820 143540 17% PAT 34570 31650 9% EBDITA 52000 45160 15% EPS 15.11 13.83 9% In Mn

FY16A

FY17E

FY18E

REVENUE

624410

661875

701587

PAT

134940

143726

159264

EBDITA

264680

276651

297765

9.84

17.98

16.88

PE

INFOSYS V/S S&P BSE 30

PERFORMANCE METRICS (June Quarter FY17- Consolidated) Profitability Analysis Net Profit Growth (Rs. In Mn)

REVENUE (Rs. In Mn)

38000 36900

37000

167820

36000 34570

35000

165000

34000

160000

33000

155000

32000

165500

170000

31650

150000

31000

145000

30000

140000

29000

135000

28000 Q1 FY16

Q4 FY16

Q1 FY17

Infosys reported strong yearly numbers with Net profit growing by 9% at Rs. 34570 mn compared to Rs. 31660 mn in the same period previous year. Income from operations stood at Rs. 167820 mn against Rs.143540 mn corresponding June quarter previous year, rising at higher rate of 17%. EBDITA jumped 15% YOY from Rs. 45160 mn compared to Rs. 52000 mn in Q1 FY17. Though the yearly numbers looked robust, QOQ figures exhibited weakness as Income from operations rose at a dismal 1.4% and PAT witnessed de-growth of 6% in present quarter QOQ. EBDITA stood at Rs. 54110 in Q4 FY16 and declined 4% in the current June quarter. As a result, Net Profit Margin fell by 170 basis points in Q1 FY17. In spite of 10 top accounts YOY growth of 10.90% & rise in large deal wins of $ 100 mn + accounts, the company lost out on pricing pressure as revenues per billed person month declined 1.30% YOY.

143540

130000 Q1 FY16

Q4 FY16

Q1 FY17

EBDITA (Rs In Mn)

52000

Q1 FY17

54110

Q4 FY16

45160

Q1 FY16

40000

45000

50000

55000

NET PROFIT MARGIN 22.50% 22.30% 22.00% 22.05% 21.50% 21.00% 20.60%

20.50% 20.00% 19.50% Q1 FY16

Q4 FY16

Q1 FY17

Segment Revenue Analysis Business Segment

Q1 FY17

Q1 FY16

CHG

Financial Services

45510

38820

17.23%

Manufacturing

18440

16160

14.11%

Energy& Utilities, Communication & Services

37190

31660

17.47%

Retail, Consumer packaged goods & Logistics

28610

23420

22.16%

Life Sc, Healthcare and Insurance

20040

18700

7.17%

Hi Tech

13220

11510

14.86%

All Other Segments

4810

3270

47.09%

BUSINESS MIX All Other Segments 3% Life Sc, Hi Tech Healthcare 8% and Insurance 12%

Retail, Consumer packaged goods & Logistics 17%

Financial Services 27%

Energy& Utilities, Commu& Services 22%

Manufactu ring 11%

All revenue segments rose, highest by Retail, consumer packaged products & logistics. The segment comprises 17% of the total revenue. The next to follow is Energy Utilities & communication services growing at 17.47% and contributing 22% of the total revenue. Financial services which contribute the highest i.e 27% stood at Rs. 45510mn against Rs. 38820 mn rising by 17.23% YOY. Rest of the business segments, Manufacturing, Life Sc, Healthcare & Insurance & Hitech witnessed yearly growth of 14%, 7% & 14.86% respectively. Growth over the previous March quarter was weak as Life Sc, Healthcare & Insurance and Hitech witnessed de-growth and Financial Services witnessed dismal growth of 0.64% compared to the previous March quarter.

Indian IT industry is facing headwinds as slow economic growth have forced companies all over the world to ramp down their IT spends. Though this may not be a long term phenomena as Informational technology and digitalization have become are irreversible aspects of any functioning economic unit. Uncertainty of global economic forces such as BREXIT leading to restructuring of European economic order will impact IT industry highly dependent on global markets and foreign currency. After USA which is the biggest market for Infosys contributing 63% of the total revenues, Europe comes second with an exposure of 22.40%. Domestic exposure is the least at 2.20% and rest of the world at 12.20%. Revenue segregated on the basis of industry is dominated by BFSI or Banking and Financial Services contributing 33% of the total revenue followed by Manufacturing & Retail both at 24% and Energy Utilities & Communication at 18.80% in the current June quarter.

REVENUE BY GEOGRAPHIC SEGMENT

REVENUE BY INDUSTRY Energy, Utilities, Comm, 18.80%

ROW, 12.20% India , 2.20%

Europe, 22.40%

BFSI, 33.10%

Retail & Life Sc, 24.10%

North America, 63.20%

Manufac, 24%

Expenditure Analysis EXPENDITURE (Rs. In Mn) Employee Benefit Expenses Cost of Technical subcontractors Travel Expenses Cost of software packages & others Communication Expenses Consultancy and professional charges Depreciation & Amortization Other Expenses

Q1 FY17

Q1 FY16

CHG%

92820

80530

15.26%

9170

7500

22.27%

7400

5560

33.09%

2760

3120

-11.74%

1200

1120

7.14%

1750

1690

3.55%

4000

3130

27.80%

8250

5820

41.75%

EXPENDITURE

1% 1%

Employee Benefit Expenses Cost of Technical sub-contractors Travel Expenses

3% 6%

7% 6% 7% 69%

Cost of software packages & others Communication Expenses Consultancy and professional charges Depreciation & Amortization Other Expenses

Employee Benefit Expenses constitute the biggest chunk of expenditure which is about 69%. In the current quarter, Employee Benefit expenses stood at Rs. 92820 mn compared to Rs. 80530 mn in the same period previous year, rising by 15% YOY. Cost of the technical subcontractors form the next biggest chunk of 7% at Rs. 9170 mn in current June quarter jumping 22% YOY. Cost of software packages declined to Rs. 9170 mn in Q1 FY17 compared to Rs. 3120 mn in same period previous year. Travel expenses constitute 6% of the total

expenditure along with other expenses. Depreciation & Amortization at Rs. 4000 mn constitute 3% of expenditure in Q1 FY17.

Corporate Profile In 1981, seven engineers started Infosys Limited with just US$250. From the beginning, the company was founded on the principle of building and implementing great ideas that drive progress for clients and enhance lives through enterprise solutions. For over three decades, the company focused on bringing to life great ideas and enterprise solutions that drive progress for its clients. Infosys has a growing global presence with more than 197,000+ employees. Globally, it has 85 sales and marketing offices and 114 development centers as on March 31, 2016. Infosys is a global leader in technology services and consulting. The company enables clients in more than 50 countries to create and execute strategies for their digital transformation. From engineering to application development, knowledge management and business process management, it helps its clients to find the right problems to solve, and to solve them effectively. The company has with a team of 190,000+ innovators, across the globe, is differentiated by the imagination, knowledge and experience, across industries and technologies, it brings to every project it undertakes.

Business Highlights – Q1 FY17 

The company has launched Infosys Mana, a knowledge-based AI platform that brings machine learning together with the deep knowledge of an organization, to drive automation and innovation – enabling businesses to continuously reinvent their system landscapes. The company is already working with a number of clients including JCI and Syngenta.



The company made an investment in Trifacta, a leading provider of data wrangling software that enables non-technical users to easily transform data for analysis. As part of this investment, Trifacta will provide a data wrangling solution for the Infosys Information Platform (IIP) and Infosys’ other platforms and offerings.



The EdgeVerve business continued its strong market momentum with 16 wins and 21 go-lives for both the Finacle and Edge suite of solutions across markets.



The Finacle Core Banking solution was selected to power Paytm’s new payments bank business. Paytm will leverage Finacle’s proven platform for its deposit products and payments platform, enabling it to rapidly roll out innovative offerings.



National Australia Bank has chosen Infosys to build and run the technology solution that will enable it to participate in the New Payments Platform (NPP), an industry-led program in Australia that is aimed at delivering faster, flexible and data-rich payments.



Carl Zeiss Group AG, the world’s most respected company for precision optics and optoelectronics manufacturing, has selected Infosys as its key strategic partner for consulting and application services. As strategic partner, Infosys will support the Zeiss Group as it consolidates and transforms its SAP landscape over the next five years, as well as helping in the transition towards HANA and cloud-based services such as MS Azure. Infosys’ support for Zeiss is enabled by a strong backbone of AI-based automation, design thinking framework and leveraging the power of open source and cloud.



The Company has entered in to a Joint venture agreement with Saudi Prerogative Company (‘SPC’), in the Kingdom of Saudi Arabia to conduct IT services for customers located in the Kingdom of Saudi Arabia. The Joint venture will be in the ratio of 70:30 (Infosys: SPC) and the agreement is subject to the approval of Saudi Arabian General Investment Authority (‘SAGIA’).

Financial Analysis

QUARTERLY PROFIT & LOSS STATEMENT OF INFOSYS FROM 30TH JUNE 2015 TO 30th SEP 2016E VALUE RS. IN MILLION

30-June-15 3 months

31-Mar-16 3 months

30-Jun-16 3 months

30-Sep-16E 3 months

143540

165500

167820

157751

OTHER INCOME

7560

7720

7530

7681

TOTAL INCOME

151100

173220

175350

165431

EXPENDITURE

-105940

-119110

-123350

-122117

EARNINGS BEFORE DEP, INTEREST &TAX

45160

54110

52000

43315

DEPRERCIATION

-3130

-4190

-4000

-4080

0

-10

-20

0

PROFIT BEFORE TAX

42030

49910

47980

39235

TAX

-11750

-13940

-13620

-12939

PROFIT AFTER TAX

30280

35970

34360

26296

COMPREHENSIVE INCOME

1370

930

210

225

TOTAL COMPREHENSIVE INCOME

31650

36900

34570

26521

EQUITY CAPITAL

11440

11440

11440

11400

5

5

5

5

13.83

16.13

15.11

12.00

INCOME FROM OPERATIONS

SHARE IN PROFIT/LOSS OF ASSOCIATE

FACE VALUE EPS

ANNUAL PROFIT & LOSS STATEMENT OF INFOSYS FROM 31st MARCH 2015 TO 31ST MARCH 2018E VALUE RS. In Million INCOME FROM OPEARTIONS

31- Mar-15 12 months

31- Mar-16 12 months

31- Mar-17E 12 months

31-Mar-18E 12 months

533190

624410

661875

701587

OTHER INCOME

34270

31250

33125

35444

TOTAL INCOME

567460

655660

695000

737031

-328830

-390980

-418349

-439266

EBDITA

238630

264680

276651

297765

ADMINISTRATION EXPENSE

-36630

-42920

-44208

-46418

SELLING EXPENSE

-29410

-34310

-35682

-36396

PROFIT BEFORE TAX

172590

187450

196761

214951

TAX

-49290

-52510

-53035

-55687

PROFIT AFTER TAX

123300

134940

143726

159264

0

0

0

0

-10

-30

-10

0

123290

134910

143716

159264

5720

11440

11440

11400

541910

606350

666985

733684

5

5

5

5

107.77

58.96

62.81

69.85

EXPENDITURE

MINORITY INTEREST SHARE IN P/L OF ASSOCIATES NET PROFIT EQUITY CAPITAL RESERVES FACE VALUE EPS

BALANCE SHEET OF INFOSYS FROM 2015 TO 2018E CAPITAL & LIABILITIES (Rs. In Mn)

2015

2016

2017E

2018E

5720

11440

11440

11440

541910

606350

666985

733684

547630

617790

678425

745124

DEFERRED TAX LIABILTIES

1600

2560

3072

3686

OTHER LONG TERM LIABILITES TRADE PAYABLES OTHER CURRENT LIABILITIES SHORT TERM PROVISIONS TOTAL LIABILITIES

460

1150

1438

1696

1400 107650

3860 123410

4632 135751

5466 156114

4780

5120

5632

6364

663520

753890

828950

918450

97630

115150

129918

139666

14380

19140

23351

27554

5370 30910

5360 37640

5628 43286

6022 51943

43270

59650

65615

73489

191560

236940

267798

298673

8740

750

863

966

97130

113300

124630

139586

303670

326970

349858

384844

62420

75930

85801

94381

471960

516950

561151

619776

663520

753890

828950

918450

CAPITAL RESERVES & SURPLUS NETWORTH

ASSETS (Rs. In Mn) NON CURRENT ASSETS: FIXED ASSETS NON CURRENT INVESTMENTS DIFERRED TAX ASSETS GOODWILL OTHER NON CURRENT ASSETS TOTAL NON CURRENT ASSETS CURRENT ASSETS: CURRENT INVESTMENTS TRADE RECEIVABLES CASH & BANK BALANCES OTHER CURRENT ASSETS TOTAL CURRENT ASSETS TOTAL ASSETS

Ratio Analysis Year

FY 15A

FY 16A

FY 17E

FY18E

EPS

107.77

58.96

62.81

69.61

NPM

23%

22%

22%

23%

BOOK VALUE

478.70

270.01

296.51

325.67

ROE

23%

22%

21%

21%

P/BV

2.17

3.84

3.50

3.18

PE

9.62

17.58

16.50

14.89

Comparative Analysis (Consolidated) Q1 FY17

EPS

PAT (Rs. In Mn)

PBT (Rs. In Mn)

MKT CAP (Rs. In Mn)

INFOSYS

15.11

Rs. 34570

Rs. 47980

Rs. 2371855

TCS

32.06

Rs. 63180

Rs. 83100

Rs. 4768928

HCLTECH

14.57

Rs. 20552

Rs. 26085

Rs. 1123861

WIPRO

8.35

Rs. 20590

Rs. 26711

Rs. 1169334

Industry- Current Scenario India is one of the most important players in Global IT industry which is about $ 130 bn. Our Information Technology industry has transformed India into one of the biggest sourcing markets in the world. Infosys, Tatat Consultancy Services, Wipro & HCL Tech are the big four of the Indian IT industry. The mid-tier comprises of companies such as Persistent systems, Mindtree, Tech Mahindra to name a few. Indian IT industry employs about 10-12 million and continues to forge ahead with its cost competitiveness due to inherent advantages such as skilled labor & strong educational system etc. The IT software & hardware sector attracted cumulative Foreign Direct Investment inflows of about $ 21.02 billion over the last 15 years. The industry is facing headwinds as global IT spend has reduced over the last few quarters and the recent BREXIT has made matters worse losing clients as the economic restructuring has started in Europe. As the Indian IT sector depends on international markets like USA, Europe, UK etc, any global mood swing is able to upset earnings growth of the Indian IT companies which is an inherent risk in this export oriented industry.

OUTLOOK FOR THE BANK  Liquid assets including cash and cash equivalents and investments were Rs. 332120 mn as on June 30, 2016 as compared to Rs. 344680 mn as on March 31, 2016 and Rs. 302350 mn as on June 30, 2015. Dividend payout of Rs. 32560 mn was made during the quarter.  The company has launched MANA, a knowledge-based AI platform that drives automation and innovation – enabling businesses to continuously reinvent their system landscapes.  The EdgeVerve business continued its strong market momentum with 16 wins and 21 go-lives for both the Finacle and Edge suite of solutions across markets. The Finacle Core Banking solution was selected to power Paytm’s new payments bank business. Paytm will leverage Finacle’s proven platform for its deposit products and payments platform, enabling it to rapidly roll out innovative offerings.  The operating margin of the company is stable at 24% and has not deteriorated further. The operating cash flow has improved 30% from $345 mn to $ 452 mn.  The company is in the process of transforming itself to take on the global challenges head on by following a simple strategy of renewing its core business and innovating into new businesses. The proportion of rebid of its own work to new deals was in the ratio of 70:30 for the quarter.  Infosys is still the force to reckon especially with strong top management and amazing global credibility it enjoys both among investors and business groups. Indian Government had chosen Infosys for rollout of GST. The company has about 1,100 clients and over 1,500 sales people in more than 50 countries across the group. With Brexit behind it and US picking up, the stock is not expected to go below Rs. 1000 levels and will move up in the next two quarters. Thus we recommend BUY for the stock for medium and long term.

SUHANI ADILABADKAR [email protected] 9701063320

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