ADR INFOSYS (NYSE:INFY)
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BLOG ON INFOSYS-31ST DEC 2012 BY VIBHA JHOL
Infosys was set up in July 1981 at Mumbai. It is currently headquartered in Bangalore India and Infosys has an ADR i.e. the stock in the form of ADR is listed on the American Stock Exchanges. It is one of the bellwether stocks of India which has underperforming in recent times. Its turnover as of September 2012 was INR 9757 Crores i.e. US$ 1840.94 Million (1 USD= INR 53). Its Gross Profit as of 30th September 2012 was Rs 3393 Crores i.e. US$ 640.19 Million and its Net Profit as of 30th September 2012 is INR 2342 Crores or US$ 441.89 Million. This translates to an Operating Margin of 35% and a Net Profit Margin of 24%. This is higher than normal manufacturing companies and is a good ratio for an IT/ITEs company. On 24/12/2012, the market price of Infosys was Rs 2322.3 (US$ 43.81 at 1US$= INR 53) on the Indian Stock Exchanges which makes the P/E (Price Earnings ratio) equal to 13.96 making it an extremely attractive buy. Infosys has a Face Value of Rs 5 per share. From 24/12/2011 to 24/12/2012, the share price growth was 13.95 %, the corresponding figures over the period 2010-2011 was 19.7% and the figures for the corresponding period in 2009-2010 was 24%. This shows that the Management moved fast even in the aftermath of the subprime crisis and in the ensuing and ongoing Euro Crisis and posted double digit growth even amidst the global turmoil. The share price of Infosys in Dec 2009 was Rs 2605/- which has come down subsequently as the management had taken a stand of not cutting down on margins even if it meant losing contracts. Subsequently, management realized that they were losing profits and market share to competitors and they have realized their folly and have now taken steps to rectify their mistake and are now chasing volumes. Infosys’ head of sales & marketing, Basab Pradhan confirmed to JP Morgan that the Company had become flexible in negotiated pricing for volume growth.
Apart from pricing, the Company has also taken other initiatives. It has started a star account programme, wherein senior personnel focus on one key client rather than multiple clients. Infosys also motivates employees to focus on clients which would offer more meaningful revenue growth over the long period. JP Morgan expects Infosys to be slow to catch-up and expects an upside of Rs 2,400/- (US$ 45.28) It also expects an organic growth of 5% in dollar terms whereas the industry standard is 11-14%
Infosys is a zero debt Company which implies that it is well positioned to weather economic storms. Recessionary conditions have made many debt ridden companies to seek debt restructuring or face bankruptcy. The absence of debt is a very positive point for Infosys.
Infosys has also acquired Lodestone Holding AG for US$ 349 million which it will finance from its formidable war chest i.e. Infosys will pay cash for the acquisition and will not need to borrow.
Headquartered in Zurich, Lodestone advises international companies on strategy and process optimization, and provides business transformation solutions enabled by SAP. The combination of the breadth of capabilities delivered by Infosys and Lodestone's deep experience of driving transformational change, is expected to provide clients across the two companies, a world-class team to accelerate transformation and innovation led growth.
The deal is also in line with its strategy of focusing on consulting and systems integration, which together account for 31% of the total revenue.
Management expects this deal to generate revenues over a two to five year period. Some analysts are of the view that while this will strengthen the Company’s presence in Europe but it will take some time for the benefits to flow through given the current Euro Zone crisis. Moreover, Lodestone derives nearly three-fourths of its revenues from Switzerland and Germany, which are the relatively resilient European economies.
The NIFTY in India over the last 10 years has grown 444 % and if we look at Infosys it has grown 303.28 %. But there is a catch here. Infosys had come out with a bonus issue in April 2004 in the ratio of 3:1 and again in April 2006 in the ratio of 1:1. So in real terms, Infosys has grown 809%
Citigroup in the last week of December 2012 had given a BUY on Infosys.
According to a technical analysis report in India, Infosys is testing significant long term support in the range of RS 2250-Rs 2300.( US$ 42.45-US$ 43.40) The stock’s 50% Fibonacci retracement level of its prior uptrend coincides with the aforesaid support range making it a vital support. If the stock breaks this support level it could spiral down to Rs 2100/Rs 2000 (US$ 39.62-US$37.73) this report mentions. Long term investors can look at these levels to accumulate the stock. The investors’ should have a minimum investment horizon of 3-5 years and should not be in a hurry to book profits.
If the stock manages to break the resistance level of Rs 3,000/-( US$ 56.60)it can go further high to Rs 3,300/- to Rs 3,500/- (US$ 62.26- US$ 66.04)on the Indian stock markets.
In a research paper titled-“Why not diversify internationally with ADRs” by Mahmoud Wahab and Amit Khandwala, it was found that if Americans include just 7 ADRs (50% of the investment portfolio) and the balance is in S&P 500, there was a drop of 43.7% in risk. The authors also report that the investment weights play an opposing role as far as risk and return is concerned. As far as risk is concerned, higher the ADR weight of the investible surplus, greater the risk reduction benefit, with the highest risk reduction appearing at 50% in ADRs and 50% in S&P 500. But as far as return is concerned, highest incremental return happens at 10% of the investible surplus in ADRs.
Happy Investing! Best wishes for 2013 to all investors!
THNKS & RGDS
Infosys Ltd. (NYSE: INFY)
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