William Trent1

Analysis of Infosys' Cash Flow Growth

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.

Infosys' Weak Outlook: Appreciating Rupee, Rising Wages To Blame

True - it is hard to find good programmers. But based on my experience, the quality programmer shortage is a global phenomenon. It is easy to find bodies anywhere, but the really good programmers have all started their own businesses, wherever they happen to live.

Infosys' Weak Outlook: Appreciating Rupee, Rising Wages To Blame

Thanks, Frank.

US workers may be getting nominally more expensive, but they are not getting comparably more expensive. As a percentage of US wages, Indian wages are rising. Mathematically, the advantage erodes.

You ask where else one can find the combination of growth, margin and multiple, and my answer is that you will no longer be able to find it in the outsourcers. Margins will be coming under pressure, and I doubt Infosys and the rest can continue to add 30% to their expanding employee base (which is what it takes for a consulting firm to grow). So what you are left with are 35x trailing multiples.

Infosys' Weak Outlook: Appreciating Rupee, Rising Wages To Blame

I provided the link for attrition figures.

As for the wage/currency differential, let's say that at time x Indian programmers cost 10% what US programmers cost. Assuming 10% annual relative wage gains and 10% annual relative currency gains (20% total narrowing) it would take less than 13 years for the gap to disappear.

But the gap doesn't have to be even for the demand to slow significantly. Outsourcing may only be attractive when there is a certain gap - say, at least 50% - to make up for the issues related to management, language and other factors. In that case, the relative parity would be reached four years earlier.

The further question is how long investors will pay 35x trailing earnings if the growth continues to slow.

I have been positive on the Indian outsourcing names for more than three years but have always said that the trend would end when it was too hard to grow the employee base as fast as it did the previous year. That has now happened.

Visa Cap Issues Offer Excuse for Indian Outsourcing Stocks To Pull Back

Deepak,

Thanks for the insights. There are certainly many pressures acting toward margins - rising wages (in appreciating Rupee) against weaker dollar revenues. Still, they keep managing to grow through it - much to our amazement sometimes.

I think the valuations, the growth and the margin uncertainty all contribute to a general inability to assign a good valuation, which is probably also why the stock will move on "no-news" items like the visa cap.