Analysis of Infosys' Cash Flow Growth

In continuation of my effort to apply one value investing principle of Buffett - the value of future cash flows, I thought of doing an exercise on Infosys' (INFY) cash flow over the last five years and compare this to how the market has rewarded it.

Following is a table that gives a summary of its cash flow since Fiscal 2002. The last column gives the total for each component for all the years.

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Operating cash flow vs market cap : On Jan 1, 2002, Infy was valued by the market at $8.5bn. On Jan-1 / 2007 its market cap was $34bn, which is around four times what it was on Jan 1, 2002 . In the same time its operating cash flow has increased from $191 mn to $862mn - about 4.5 times.

Valuing its investments : Out of the total $2.5bn cash generated since 2002, $1.16 bn has been spent on capital investments. Around $972 mn has been spent on adding new offices and infrastructure. Another $160mn has been spent on acquisitions.

Return on Infrastructure investment : Applying a layman's approach, let us see how these investments have impacted the cash flow changes in their corresponding years, considering it takes 1 year to start using the new facility.

Fiscal 2002 : Investment in Infrastructure - $68.34 mn
Fiscal 2003 : Net increase in operating cash flow - $20mn

Fiscal 2003 : Investment in Infrastructure - $43.15 mn
Fiscal 2004 : Net increase in operating cash flow - $162mn

Fiscal 2004 : Investment in Infrastructure - $93.22 mn
Fiscal 2005 : Net decrease in operating cash flow - $29mn

Fiscal 2005 : Investment in Infrastructure - $186 mn
Fiscal 2006 : Net increase in operating cash flow - $255mn

Fiscal 2006 : Investment in Infrastructure - $246 mn
Fiscal 2007 : Net increase in operating cash flow - $263mn

From the above table we can see that the sum net increase in operating cash flows for fiscal 2003 till fiscal 2007 is $671 mn. The sum of investments in infrastructure for fiscal 2002 till 2006 were $636mn.

Comments

[William Trent]

Although a 100% ROIC is nothing to sneeze at, I'd argue that ROIC is relatively meaningless for a company built on human capital rather than fixed capital. The profit margins are probably a more useful metric for INFY.

As to what investors are willing to pay for the cash flows, it will depend on how much of the growth they can retain as they try to grow off an ever-higher base.

[Dayanand]

The most important thing to note is the money spent on infrastructure (new offices, communication equipments, hardware etc...). It is assumed that IT consulting is the business with low capital expenditure. But the truth is somewhat different.I am sure there are very few Indian companies that have income of $800mn / year and have spent close to $1bn on infrastructure last 5 years.

With the tax benefit going to go away in 2009 and strengthening rupee, these huge capital expenditures will be studied closely by investors in future. Managing these capital expenditures will be very crucial for the growth of the company.