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Infosys
Infosys
Tanushree Seth
Company Snapshot
Global Headquarters: Bangalore, India
Employees:
LTM Dec 05 Revenue/ 5 Year CAGR: $2,014 million/ 41% LTM Dec 05 Net Income/ 5 Year CAGR: $530 million/ 37%
Company Statistics
Employer Type: Public Company Stock Symbol: INFY Stock Exchange: NASDAQ Market Share price: $74.98* Key Executives
President, CEO, MD: N. R. Narayana Murthy Nandan M Nilekani T. V. Mohandas PaiS. Gopalakrishnan V. BalakrishnanK. DineshS. D ShibulalSrinath Batni *As of 4/14/2006
Outline
Overview Investment Highlights Business model Investment positives Addressing Key market challenges: Risks Valuation Estimated growth rates of 30% and 25% Comparable company analysis Recommendation
Overview
Smart investments
In 1999, the firm became the first Indian company to list on NASDAQ In 2002, Infosys started a recruiting and marketing blitz The firm registered sales of $740 million, up 50 percent over the previous year, 2002 In 2004, , the firm hit its first billion
Overview
The U.S. dream team
The company turned its attention to the U.S. consulting market in April 2004, forming Infosys Consulting Stephen Pratt, who was named CEO of the subsidiary; Romil Bahl, former head of EDS' consulting practice; Pal Cole, former head of global operations at CGE&Y; and Raj Joshi, former CEO of Deloitte Offshore. In April 2004, the publication eWeek.com pointed out that the move was a step toward competing in the U.S. consulting market against the big guys like Accenture.
Moving forward
In 2003, Infosys launched a business-processing subsidiary, Progeon, and secured a five-year, $30-million contract from U.S. mortgage firm GreenPoint. In November 2004, Infosys and Microsoft announced an enterprise IT transformation initiative In December 2003, the firm announced its intentions to acquire Expert Information Services, an Australian IT services firm, for around $23 million.
Investment Highlights
Large, Expanding Addressable Market Highly-evolved Global Delivery Model Rapid Differentiation Scalable Execution Exceptional Financial performance
$728.00 bn
Offshore benefits: Deliver high quality at great value Highly scalable with no foreseeable supply constraints Proven track record Addressable market has increased
The India Advantage: Strong Track Record High quality delivery Significant costs benefits Strong government support Mature industry Man Power Education system 24 x 7 working model advantage
80 70 60 50 40 30 20 10 0
India
80%
Canada
China
Ireland
Infosys Revenue
500 0
LTM Sep ' 00 LTM Sep '05
Stage 2
Stage 3
2001 ________________
Technology Consulting Technology-enabled BPR Enterprise Solutions Application Development and Maintenance Software Engineering
1996 ______________
1981 ____________
People|Organization|Infrastructure|Process|Quality
NEED TO:
Replace resources Overcome offshore-is-cost-center mindset Combat revenue cannibalization Provide seamless sales and delivery Reduce SG&A
Significantly lower total cost of engagement Lower IT implementation cost = flexibility in solution delivery Greater ability to invest in managing business change
-------|
Drivers of Scalability
Superior Talent Management World Class Processes and Systems Flexible Organization Structure Modular and Robust Global Infrastructure
LEADS TO
SCALABLE EXECUTION
Scalable Execution
Superior Talent Management: Hiring the Best Able to simultaneously evaluate 10,000 people across 7 cities in India Augmenting talent through new geographies
China, Eastern Europe
Scalable Execution
Flexible Organization Structure Integrated platform for delivery of end-to-end solutions from Consulting to BPM Self-governed business units
By domain By Market By Service
Modular and Robust Infrastructure 37 Global Development Centers (GDC) Ability to rapidly scale new engagements Flexibility to distribute engagements and capacity across centers worldwide
Infosys Strategy
Continue to penetrate high valueadd segments Leverage GDM+ Enhance internal productivity Leverage economies of scale and brand Move to variable salary structure and role-based compensation Proactively hedge currency exposure
Valuation
Inputs: Current EBIT = Current Interest Expense = Current Capital Spending Current Depreciation & Amortization = Tax Rate on Income = Current Revenues = Current Non-cash Working Capital = Chg. Working Capital = Cash and Marketable Securities Value of equity options issued by firm = Book Value of Debt = Book Value of Equity = $491,000,000.00 $0.00 $186,000,000.00 $66,000,000.00 14.66% $1,592,000,000.00 $302,000,000.00 $152,852,304.00 $688,000,000.00 $52,000,000.00 $180,000,000.00 $1,253,000,000.00
Valuation
Market Value per share= Number of shares outstanding= Market Value of Debt= Length of extraordinary growth period= Beta of the stock= Risk Free rate= Risk Premium= Cost of Debt= Estimated Growth= $75 274,530,000 $180,000,000 10 years 2.03 4.86 6.60% 5.63% 30%
Valuation
Outputs:
Return on capital= Reinvestment Rate= Cost of Equity= Equity/(Debt+Equity)= After-tax Cost of debt= Debt/(Debt+Equity)= 27.20% 11% 18.26% 99.13% 4.80% 0.87%
WACC: 18.14%
Valuation
Current EBIT * (1 tax rate) - (Capital Spending Depreciation) - Change in WC Current FCFF: $146,167,096.00 $419,019,400 $120,000,000 $152,852,304
NPV of FCFF
2006 EBIT * (1 - tax rate) - (CapEx-Depreciation) -Chg. Working Capital Free Cash flow to Firm $586,198,084.13 $167,877,120.00 $120,490,752.00 $297,830,212.13 2007 $820,077,050.95 $234,856,061.83 $168,563,670.27 $416,657,318.85
Present Value
$252,096,381.22
$298,520,895.88
NPV of FCFF
2010 EBIT * (1 - tax rate) $2,245,357,256.2 2011 $3,141,200,912.8 2012 $4,394,464,688.31 2013 $6,147,750,631.7
- (CapExDepreciation)
$643,031,971.19
$899,586,294.92
$1,258,499,636.53
$1,760,610,787.5
$461,524,511.31
$645,661,714.74
$903,265,243.03
$1,263,646,396.6
$1,140,800,773.7
$1,595,952,903.2
$2,232,699,808.75
$3,123,493,447.6
Present Value
$495,677,391.45
$586,958,282.56
$695,048,899.58
$823,044,817.93
NPV of FCFF
2014 EBIT * (1 - tax rate) - (CapExDepreciation) -Chg. Working Capital Free Cash flow to Firm Present Value $8,600,555,587.86 $2,463,052,237.07 $1,767,810,981.38 $4,369,692,369.41 $974,611,675.13 2015 $12,031,970,854.09 $3,445,750,966.40 $2,473,125,135.49 $6,113,094,752.19 $1,154,090,149.91 Terminal Year $12,633,569,396.79 $3,158,392,349.20 $0.00 $9,475,177,047.59
NPV of FCFF
Present Value of FCFF in high growth phase = Present Value of Terminal Value of Firm = Value of the firm = Cash and Marketable Securities = Market Value of outstanding debt = Market Value of Equity = Value of Equity options issued by the company = Market Value of Equity/share = $6,052,135,216.05 $13,612,066,744.99 $19,664,201,961.04 $688,000,000.00 $180,000,000.00 $20,172,201,961.04 $52,000,000.00 $73.29
Firm is overvalued
Competitive Landscape
Infosys Technologies (INFY) Competitors: Wipro (WIT) HCL Technologies Ltd. Satyam Computer Services (SAY) Cognizant Technology Solutions Corp. Syntel Inc. Tata Consultancy Services Ltd. i-flex Patni Computer Systems Ltd.
Share Price
*Share price as per 4/10/2006 (2) Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market capitalization plus total debt and other value, less cash and equivalents.
4.7%
$0.0
$19,660.8
$2,622.5
$3,320.0
$846.7
$1,055.9
Wipro (WIT)
3.7%
$32.3
$19,907.8
$2,886.8
$3,613.7
$689.0
$841.3
10.2%
$41.2
$3,937.5
$1,117.8
$1,418.0
$255.4
$319.1
7.5%
$16.9
$5,834.2
$1,343.6
$1,703.2
$300.1
$377.8
Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market capitalization plus total debt and other value, less cash and equivalents.
Wipro (WIT)
6.9 x
5.5 x
28.9 x
23.7 x
3.5 x
2.8 x
15.4 x
12.3 x
4.3 x
3.4 x
19.4 x
15.4 x
$2.38
$2.87
31.6 x
26.2 x
29.4%
1.1 x
0.9 x
$0.38 $0.54
$0.46 $0.62
37.9 x 25.2 x
31.6 x 21.6 x
23.4% NA
1.6 x NA
1.4 x NA
$1.54
$1.85
25.2 x
20.9 x
21.5%
1.2 x
1.0 x
Thank you!