Wednesday, October 11, 2006

Wow, what a company! Infosys Technologies (INFY).

Infosys Technologies reported yet another robust financial performance for the quarter ended Sept'06. The company recorded a phenomenal 50.8 per cent growth in sales to Rs.3,273 crore. I use the word phenomenal, because, the growth comes on top of a 28.4 per cent growth in sales in the Sep'05 quarter. In fact, a look at the growth recorded by the company in the last five quarters indicates an acceleration in the same.

Q2'07 - 50.8%
Q1'07 - 45.7%
Q4'06 - 31.2%
Q3'06 - 33.3%
Q2'06 - 28.4%
Q1'06 - 33.7%

All this while the company has been successful in earning net margins of around 24-25%. For greater details of the company's results check the link.

Now for the interesting part, the future and how it can pan out:

The company's FY'07 sales forecast of Rs.13,853 crore and PAT forecast of Rs.3,437.8 crore looks to be on course. Taking these into account, the average annual growth over the past five years comes to around 48.8 per cent in sales and 40.5 per cent in net profit. Lets use these numbers to get some idea of the future:

Scene 1 - Most optimistic: The company retains this CAGR over the next five years.

Sales at the end of year 2012: Rs.101,055.2 crore (Phew!!)
Net profit @ end of year 2012: Rs.18,821.9 crore
Probability of this happening: 1% (Since nothing can be ruled out in this world...not even this unlikely scenario).

Scene 2: Optimistic: The CAGR halves to 24.4% and 20.25%, respectively.

Sales at the end of year 2012: Rs.41,271.1 crore
Net profit @ end of year 2012: Rs.8,643.9 crore
Probability of this happening: 49%

Scene 3: Pessimistic: The CAGR drops to 10% at both the topline and bottomline.

Sales at the end of year 2012: Rs.22,310.4 crore
Net profit @ end of year 2012: Rs.5536.6 crore
Probability of this happening: 50%

Summing up of all probabilities:

Estimated sales @ end of year 2012: Rs.32,388.6 crore.
Estimated net profit @ end of year 2012: Rs. 7,192.0 crore.

Discounting the NPAT of year 2012:

P/E = 10 times, Mcap = 71,920 crore
P/E = 15 times, Mcap = 107,880 crore
P/E = 20 times, Mcap = 143,841 crore
P/E = 25 times, Mcap = 179,800 crore

A P/E of 25 times five years down the line maybe difficult to achieve, given an estimated growth rate of less than 20%. I think a more realistic P/E ratio would be somewhere close to 20 times. That would take Infosys' target mcap to Rs.143,841 crore. Given that its current mcap is around Rs.110,000 crore, there could be an upside of 31 per cent over the next five years. Translate this into a CAGR and the return per annum over the next five years could be in the range of 5.5 per cent.

Which brings me to a question: Is Infosys a good investment at these levels?

PS: The analysis would mostly seem naive and quite honestly it is. I have no great knowledge of the software industry and nor am I very good at predictions. Its just a rough extrapolation of the company's performance over the last few years. But, I think I can confidently claim that a repeat of last five years performance will be highly unlikely over the next. I think the company's growth rate would come down dramatically, as it did during 2001-06, compared to over 100% growth during 1996-01.

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