Infosys Leads the Indian IT Services Pack (CTSH, INFY, SAY, WIT)

Includes: CTSH, INFY, SAY, WIT
by: Asif Suria
Infosys (NASDAQ:INFY) is one of the largest Indian IT firms with annual revenue of $2.15 billion and over 52,000 employees worldwide. The rapid pace of IT outsourcing has definitely helped Infosys grow at an annual rate of over 30% over the last few years. During a recent conference call discussing the fourth quarter and full year results, CEO Nandan Nilekani remarked "it took us 23 years to reach our first billion and it’s taken us 23 months to reach our second billion" referring to the annual revenue of Infosys.

Just like close competitor Wipro (NYSE:WIT) who is expanding in the Middle East, Infosys is seeing robust growth in Europe, with 25% of its revenue now coming in from Europe when compared to 63% from the United States. When it released its full year results in mid-April, Infosys proposed a stock split and the stock rallied 13.07% to $83.74. This was before the sell off in the Indian stock market and the stock is now at $70.60, well below where it was when the split was announced. As discussed in a separate post, stocks that declare splits tend to outperform the general market and hence I picked Infosys as a dual play on international investing and the stock split theory.

Infosys has a very strong balance sheet with $1,509 million in total current assets when compared to just $209 million in current liabilities. Interestingly, given the number of acquisitions that Indian IT firms have embarked upon over the last year, only $8 million is listed under goodwill on the balance sheet.

Looking at the following table that compares four of the largest Indian IT companies, it becomes clear that while Infosys does not have the scorching earnings growth of Satyam Computer (SAY) or Cognizant Technology (NASDAQ:CTSH), it enjoys the best profit margins and hence generates the maximum earnings amongst this group. I have not included Tata Consultancy Services [TCS] in this comparison as it not quoted on the NYSE. I have instead substituted TCS with Cognizant Technology Solutions (CTSH) which is based in the United States and is not an ADR (American Depository Receipt) like Wipro, Infosys and Satyam. Cognizant was included in this comparison as it has a business model that is similar to other large Indian IT firms and has a strong presence in India.

IT consulting and outsourcing is a highly competitive sector with many large and small companies vying for a piece of the same pie. As mentioned above, Infosys faces competition from Wipro (WIT), Satyam (SAY), Cognizant (CTSH) and Tata Consultancy Services. Apart from these companies, Infosys also faces competition from IBM (NYSE:IBM), Accenture (NYSE:ACN), BearingPoint (BE), Sapient (NASDAQ:SAPE) and iGATE (NASDAQ:IGTE). With this much competition, it is impressive to see that Infosys has been able to maintain a profit margin of 25.79%.

The Good:

* Infosys continues to grow both revenue and earnings at greater than 30% a year.
* Infosys maintains one of the best profit margins in this industry and with revenue exceeding $2 billion last year, it generated more than half a billion dollars in earnings.
* The balance sheet is rock solid with over a billion dollars in cash and short-term investments and no debt.
* The company has proposed a stock split and two special dividends amounting to 86 cents a share.

The Bad:

* Consulting and outsourcing is a highly competitive sector with numerous large and small players.
* Infosys along with other Indian IT firms faces problems like employee attrition and rapid wage expansion.
* Earnings could be impacted by currency fluctuations.
* If expectations of continued high growth are not met, the stock could face a steep decline.

The Numbers:

  • P/S 8.93
  • Cash $889 Million
  • P/E 35.48
  • Long Term Debt $0 Million