Strong Top-Line Growth From This Indian Tech Consultancy

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India is well known for its prowess in tech consulting and outsourcing, an industry that has led to the rapid growth and development of cities like Bangalore. With a young and often well-educated workforce, India has carved out a niche for itself in the global economy in which it is very competitive. One of the biggest Indian tech consultancies recently reported strong earnings, displaying the company’s ability to maintain impressive revenue growth.

Introducing Infosys (NYSE: INFY)

Infosys, with a market cap of $23.5 billion, is one of India’s leading tech companies. Based in Bangalore, the firm employs over 150,000 people. The company offers a range of business and IT support services, including systems integration, enterprise solutions, application development and infrastructure management. The stock is up some 17% over the last twelve months, following its most recent report. It has a beta of 1.16 and yields 1.68%.

Strong Revenue Growth

Looking at the company’s earnings history, we can see a pattern of slow but steady earnings growth over the years. The company doubled its annual EPS between 2007 and 2012, going from $1.45 to $3.00 per share. Moreover, the company hasn’t missed a quarterly report in years, and its revenue growth was larger than the industry average in 2011 and 2012.

The top-line growth was perhaps the most impressive part of the most recent earnings report, that of Q1 2013. EPS in dollar terms of $0.73 beat the consensus estimate of $0.70, with net income profit rising only 0.5% year-over-year. In rupees, though, net income was up 3.7% and revenue a sizable 17.2% year-over-year, easily beating estimates.

This performance was driven in no small part by strength in Cloud Computing and Big Data, an area in which the company sees plenty of room for growth. In the last quarter, the company acquired 15 new engagements in this division. Management is cautiously optimistic about the rest of the year, expecting revenue to grow between 13% and 17% in rupee terms.

Competitors

Accenture (NYSE: ACN), a large competitor hailing from the UK, recently delivered earnings that missed the analyst consensus, indicating that the company may not be faring as well as Infosys in a tough IT spending environment. Revenue came in at $7.20 billion, quite substantially missing the $7.42 billion consensus. Earnings weren’t much better. EPS for the quarter came in at $1.06, under the $1.13 estimate.

Teradata (NYSE: TDC), an American competitor, recently delivered a fairly poor report as well. Q1 2013 EPS came in at $0.43, well under the $0.53 consensus. Revenue was down 3% in constant currency, and gross margin declined to 52% from 55.1% in the same period a year ago. According to management, the slow start to 2013 was expected, yet, the company now expects revenue and earnings at the lower end of previously given guidance.

Valuations and Metrics

Infosys is trading at quite reasonable multiples compared to its industry peers and the broader market, with a P/E of 15.29 compared to Accenture’s 16.91 and Teradata’s 24.7. The price-to-sales is a little high, though, at 3.45. On the other hand, the return on equity of 26.80% is quite good, and the operating margin of 25% is substantially higher than the industry average. The firm furthermore has an excellent balance sheet, with no debt and nearly $4 billion in cash.

The Bottom Line

As a leader in its industry, Infosys’ latest earnings report shows that the company is able to maintain growth in a challenging macroeconomic environment. Revenue was up quite substantially, as strength in Big Data and Cloud Computing is paying off. With a reasonable valuation to boot, Infosys looks like a compelling opportunity in the tech sector. 

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