Company Update

August 30, 2016

Rating matrix
Rating
Target
Target Period
Potential Upside

:
:
:
:

Infosys (INFTEC)

Buy
| 1290
12 months
26%

Renew & new strategy to navigate headwinds

Whats Changed?
Target
EPS FY17E
EPS FY18E
Rating

Unchanged
Unchanged
Unchanged
Unchanged

Key Financials
| Crore
Net Sales
EBITDA
Net Profit
EPS (|)

FY15
53,319
14,901
2,369
53.9

FY16
62,441
17,078
2,394
59.0

FY17E
70,022
19,241
9,421
64.7

FY18E
78,825
21,336
2,374
71.8

FY15
18.9
23.9
13.5
4.3
22.5
31.4

FY16
17.3
21.9
11.6
3.8
21.8
30.2

FY17E
15.8
19.9
10.1
3.4
21.4
30.0

FY18E
14.2
18.0
8.8
3.0
21.2
29.8

Valuation summary
P/E
Target P/E
EV / EBITDA
P/BV
RoNW (%)
RoCE (%)

Stock data
Particular
Market Capitalization (| Crore)
Total Debt
Cash and Investments
EV (| Crore)
52 week H/L
Equity capital
Face value

Amount
233,352.0
32,697.0
187,037.2
1278 / 1009
1,144.0
|5

Price Performance
TCS
Infosys
Wipro
HCL Tech

| 1021

1M

3M

6M

12M

0.6
(2.5)
(2.5)
(10.5)

9.1
7.6
0.9
(11.2)

7.4
18.5
(1.5)
(11.4)

(3.5)
18.1
(2.6)
(23.9)

Research Analysts
Deepak Purswani, CFA
deepak.purswani@icicisecurities.com
Tushar Wavhal
tushar.wavhal@icicisecurities.com
Deepti Tayal
deepti.tayal@icicisecurities.com

ICICI Securities Ltd | Retail Equity Research

Infosys Technologies (Infy) held its analyst meet to articulate its strategies
in the midst of a cautious business environment prevailing in the industry.
The management did highlight that Q2FY17 would be better than Q1FY17
by addressing challenges in consulting vertical while Finacle witnessed it
in Q1FY17. However, the management cited caution about the business
environment on account of uncertainty prevailing across the industry and
due to client specific concerns post Brexit. While Infosys would evaluate
its full year FY17 revenue guidance of 10.5-12% in CC terms post Q2FY17
results, an overall cautious environment post Brexit could pose a risk to
its FY17 guidance, in our view. On the other hand, the companys dual
strategy of renew and new along with automation platforms as Mana is
going on the right trajectory paving the way for the companys growth on
a long term basis.
Ca utio us envi ro nme nt ma y pos e r is k to FY17E guidance
The management cited caution about the business environment on
account of uncertainty prevailing across the industry and due to client
specific concerns post Brexit. Nonetheless, Infosys anticipates Q2 will be
better than Q1, backed by strong execution. The management reported
that a decline in core business (3.6% QoQ, 11.2% YoY) was mainly
attributable to challenges in the consulting business. However, it expects
India business units and its Finacle business to grow in Q2 and feels the
de-growth in consulting business was by and large arrested in the current
quarter. Furthermore, the management expects the Indian projects to
gain momentum. In our view, this could offset the impact of Royal Bank of
Scotland (RBS) deal cancellation announced earlier this month. Overall,
the management would evaluate its full earlier revenue guidance of 10.512% in CC terms post Q2FY17 results. In our view, an overall cautious
environment post Brexit could pose a risk to its FY17 guidance.
Re it era t es i t s re new co re & i nn o v at e n ew st r at egy
The company reiterated its dual strategy of renewing the core business
and entering into new businesses for driving growth, along with the third
pillar of culture of learning, creativity and purpose. The dual strategy has
led to top accounts growth (average size of 10 accounts grew 8.0%YoY to
$ 217 million in Q1FY17) and large deal wins (TCV grew 45% YoY at $ 2.8
billion in FY16). According to Infy, a fundamental improvement in renewal
business is from automation along with artificial intelligence capabilities. It
will continue to focus on automation and innovation by bringing more
new age products such as Mana, Skava and Panaya on its platform, which
are playing a key role in improving productivity. The management
alleviates concern over the senior management exits as it mentions large
part of it was performance based. Furthermore, to bring next generation
leaders, the company is expanding the bandwidth of the business with
addition of small business units of size ~$500-700 million, thereby leading
to more focus on strategic initiatives.
Clear picture on guidance post Q2FY17; maintain BUY
While Infosys would evaluate its FY17 guidance post Q2FY17 results due
to the impact of near term headwinds, the efforts towards Renew & New
strategy such as increase in large deal win and top client revenues would
pay off over the medium term. We expect Infosys revenues to grow at a
CAGR of 12.4% with average EBIT margin of 25.1% over FY16-18E.
Hence, we maintain our BUY recommendation on Infosys with a revised
target price of | 1290 (18x its FY18E EPS).

Financial summary
Profit and loss statement
(Year-end March)
Total operating Income
Growth (%)

| Crore

Cash flow statement

FY15

FY16

FY17E

FY18E

(Year-end March)

53,319

62,441

70,022

78,825

Profit after Tax

| Crore
FY15

FY16

FY17E

FY18E

12,329

13,491

14,793

16,402

6.4

17.1

12.1

12.6

31,814

37,640

42,308

48,030

Admin expenses

3,663

4,292

4,691

5,202

Inc/(dec) in CL and Provisions

873

842

1,234

1,154

S&M expenses

2,941

3,431

3,781

4,257

Taxes paid

(6,751)

(5,865)

(6,042)

(6,699)

Total Operating Expenditure

38,418

45,363

50,781

57,488

CF from operating activities

10,752

12,243

12,283

13,701

EBITDA

14,901

17,078

19,241

21,336

(Inc)/dec in Investments*

1,101

88

3,100

3,500

Growth (%)

11.1

14.6

12.7

10.9

(Inc)/dec in Fixed Assets

(2,247)

(2,723)

(2,500)

(2,500)

Depreciation

1,069

1,459

1,506

1,735

CF from investing activities

(1,279)

(3,116)

600

1,000

Other Income

3,427

3,125

3,100

3,500

Dividend paid & dividend tax

(4,935)

(6,813)

(7,488)

(8,290)

17,258

18,742

20,835

23,101

4,929

5,251

6,042

6,699

12,329

13,491

14,793

16,402

15.8

9.4

9.7

10.9

54

59

65

72

15.8

9.4

9.7

10.9

COGS (employee expenses)

PBT
Total Tax
PAT
Growth (%)
EPS (|)
Growth (%)

Source: Company, ICICIdirect.com Research

Add: Depreciation

1,069

1,459

1,506

1,735

(Inc)/dec in Current Assets

(2,004)

(3,096)

(2,150)

(2,090)

CF from financing activities

Others

(4,935)

(6,813)

(7,488)

(8,290)

Net Cash flow

4,538

2,314

5,396

6,411

(121)

16

Opening Cash

25,950

30,367

32,697

38,093

Closing Cash

30,367

32,697

38,093

44,504

FY15

FY16

FY17E

FY18E
71.8

Exchange difference

Source: Company, ICICIdirect.com Research

Balance sheet

| Crore

Key ratios

FY15

FY16

FY17E

FY18E

(Year-end March)

572

1,144

1,144

1,144

Per share data (|)

Reserve and Surplus

54,191

60,635

67,940

76,052

EPS

53.9

59.0

64.7

Total Shareholders funds

54,763

61,779

69,084

77,196

Cash EPS

58.6

65.4

71.3

79.3

239.6

270.3

302.2

337.7

(Year-end March)
Equity Capital

Employee benefit obligations

Debt
Deferred Tax Liability

160

256

256

256

Cash Per Share

Operating Ratios (%)

Other non current liabilties

Total Liabilities

BV

46

115

115

115

54,969

62,150

69,455

77,567

Assets

DPS

24.5

28.0

31.0

132.9

143.1

166.7

194.7

EBIT Margin

25.9

25.0

25.3

24.9

PBT Margin

32.4

30.0

29.8

29.3

Property,plant and equipment

9,125

10,530

11,524

12,289

PAT Margin

23.1

21.6

21.1

20.8

Goodwill

3,091

3,764

3,764

3,764

Debtor days

66

66

66

66

638

985

985

985

Unbilled revenue

19

17

18

18

Available for sale assets

1,345

1,811

1,811

1,811

Creditor days

Other assets

4,864

6,501

6,501

6,501

Return Ratios (%)

21.2

Intangibles

30,367

32,697

38,093

44,504

RoE

22.5

21.8

21.4

Investment in CD

Cash

RoCE

31.4

30.2

30.0

29.8

Trade receivables

9,713

11,330

12,756

14,359

RoIC

68.9

65.7

69.0

71.6

Unbilled revenue

2,845

3,029

3,736

4,206

101

116

133

149

Other current assets

4,170

4,523

4,523

4,523

Total Current Assets

47,196

51,695

59,241

67,741

140

386

184

Unearned revenue

1,052

1,332

OCL & provisions

10,188

Total Current Liabilities

Net Current Assets
Application of Funds

54,969

Prepayment & O.fin.assets

Trade payables

Valuation Ratios (x)

P/E

18.9

17.3

15.8

14.2

EV / EBITDA

13.5

11.6

10.1

8.8

EV / Net Sales

3.8

3.2

2.8

2.4

207

Market Cap / Sales

4.4

3.7

3.3

3.0

1,382

1,555

Price to Book Value

4.3

3.8

3.4

3.0

11,516

12,903

13,860

11,383

13,239

14,473

15,627

35,813

38,456

44,768

52,115

62,150

69,455

77,567

Source: Company, ICICIdirect.com Research

Solvency Ratios
Debt/EBITDA

Debt / Equity

Current Ratio

1.9

1.9

1.9

1.9

Quick Ratio

1.9

1.9

1.9

1.9

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey

Head Research

pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research

Page 3

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