Time to Buy Infosys, Indian Outsourcers?

Founded in 1981 by seven software engineers with the equivalent of $250, Infosys Technologies (INFY) is now one of the world's largest IT services firms. The Bangalore-based firm offers a full range of IT services, from application maintenance to management consulting. Although it's known best for offshore work, more than 50% of revenue comes from on-site and near-shore assignments in India. The company reports earnings on April 15.

Analyst consensus rating for Infosys is a "Hold", according to Reuters. Our Piqqem Sentiment crowd rating for Infosys is a moderately bullish 2.47 (on a scale of 0-4). However, sentiment trend is strongly positive with an increase of 19 basis points over the past three weeks off a 6-month low of 2.29. The stock has rebounded recently off 52-week lows but priced at $27 per share remains well off 52-week highs.

Considering the strong February U.S. durables goods orders government report posted today on computer equipment sales, a likely precursor to a tech turnaround, its possible that the analysts may be missing the turn in the outsourcing market. A comparatively cheaper rupee certainly doesn't hurt Indian outsourcers, either .

The most important point for an information technology company in India is to have the largest and the best pool of professionals working for you. While many of its peers have been trimming headcount, Infosys continued to hire employees to keep up with the incremental demand. Infosys hires new recruits at will: Only 1.5% of applicants eventually get hired, and 5% of new hires do not graduate from mandatory training. The firm has a training campus in Mysore that is the largest corporate training facility in the world. No other company in India boasts to be the most popular choice for professionals like Infosys. By hiring a significant amount of relatively lower-paid new recruits every year and holding attrition down, Infosys is able to manage labor costs aggressively.

Infosys Technologies is building its presence in the outsourcing market by pursuing high-quality prospects among the world’s largest companies. Also, it is diversifying its customer base by forging relationships with companies in the pharmaceutical, banking, retail, and manufacturing sectors, among others. With a stronger product lineup, Infosys is penetrating accounts in Europe much faster than it initially did in the United States.

On the flip side, growing offshore deals also brings havoc in operating margins due to foreign currency fluctuations. Infosys uses financial instruments to hedge the currency risk, but strengthening rupee could hurt operating margins a lot. Obama’s current policies to curb outsourcing could hurt this corporation too.

The company is financially sound, with no debt, and generates strong cash flow. Infosys carries a better credit rating than India's sovereign credit rating, an unusual thing. What’s more, it should benefit from greater opportunities for outsourcing in software development, engineering design, network management, and customer service. And recent accounting scandals surrounding rivals Satyam (SAY) and Wipro (WIT) are casting INFY in a brighter light.

Historically, Infosys has outperformed the market and many of its peers in the last 5 years and made millions for its investors. Profitability remains to be one of the best in industry and in the market. ROE over the past 5 years has been nearly 30%. Net profit margin is also outstanding.

Valuations remain strong and financially the balance sheet is one of the neatest in the market. A few things to look for would be in India general elections are in April and May, a time when market sentiments are pessimistic. Infosys has not enjoyed the same upside tech rally as many American stocks, although in the past it has traded with that group. So its possible there is a lot of upside room to run for Infosys if the tech turnaround gets real. Any upside surprise would likely send shares upwards.

Research Associate Pratik Shah assisted with this report.

Disclosure: The authors do not hold any positions long or short in this stock

Comments

[Tanmay Purohit:]

INFOSYS(1372) is breaking out of a major consolidation pattern and target in a year can be 1750-1800 in my view. Dropping interest rates can benefit the bullish sentiment as it has got a good dividend yield also - a stock to have in the portfolio.

Mar 26 12:00 PM

[woozycoolguy:]

Accounting scandal at Wipro ?????

When did this happen?

Mar 27 12:27 AM

[Pratik Shah:]

Well Wipro also faced few allegations on accounting scandals when Satyam case came up.

There is nothing to worry about Wipro...... its clean.



On Mar 27 12:27 AM woozycoolguy wrote:

> Accounting scandal at Wipro ?????
>
> When did this happen?

Apr 02 02:53 AM

[Alan Young:]

Very well-written article, thanks.

Apr 03 04:02 AM