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Jul 16, 2012, 08.18 AM IST
Investment expert Sunil Dalmia outlines four reasons why one should bet on Infosys for the next three years.
By Sunil Damania
There has been debate amongst investors about Infosys ’ falling fortune after disappointing first quarter results. The scrip fell around 10% in two trading sessions as the market priced in lower earnings growth. On the other hand, TCS reported better-than-expected results, raising questions on Infosys’ strategy and execution skills. One of the leading business daily on Friday carried an article on the front page with title “IT’s over for Infy: TCS is the new Bellwether”. There is no doubt that TCS is doing excellent job in terms of operations and profitability, but investors must chase stocks that promise good capital appreciation for the risk one is taking.
I feel that Infosys is one stock that deserves to be in one’s portfolio, especially when sentiment for the stock is near historical lows. It has underperformed TCS and broader market over last one year. I am suggesting going against the market trend and this would help you to create alpha on your investments.
I am outlining four strong reasons why one should bet on the Infosys for next three years.
Quarterly Net profit growth of 33%
When global as well as domestic economic outlook is weak it’s very difficult for many good companies to show even higher single digit growth. But Infosys, on the other hand, despite much adverse business conditions reported 33% year-on-year growth in net profit for quarter ended June 2012. I am not sure how many companies for the quarter would be able to show over 25% growth in their net profit. In this context Infosys results are good. Remember one is looking at TCS and then comparing with Infosys. But one must understand that Infosys is in the process of overhauling its business model and hence there could be short term pain before the strategy starts paying off. Infosys management has said that they are here for the marathon and not a sprint and hence one must have patience before jumping to any conclusion. Many investors would recollect that Tata Motors incurred huge losses before it entered the four wheeler passenger car businesses with launch of Indica in 1990s. Many investors had written off Tata Motors.
Valuations make a company good or bad. While one looks at share price of Infosys, its valuation is really looking attractive. The company’s trailing 12 months price earnings is at 14.4 times against TCS of 21.48 times. I strongly believe that TCS and Infosys P/E would converge in next three years and hence makes sense to get into Infosys. Infosys always commanded higher P/E against TCS despite having higher floating stock.
Also if one looks at historical P/E of Infosys, the counter looks attractive as lowest P/E it commanded in last ten years was in 2009 when it stood at 13.3. At the same time, Infosys at present is commanding lowest P/E amongst the top four IT firms. I am not sure how long Infosys would continue at that level.
Historical P/E commanded by Infosys
Neat and clean Balance sheet
The company follows one of the best corporate governance practice and has impeccable record of transparency. What is icing on the cake is that it has cash and cash equivalent of Rs 20,596 crore as on June 2012. Going by the statements from the management I feel that it will use this cash pile to acquire assets in next six months. Also the company ruling out buy-back is a good pointer that acquisition is on cards. Even if acquisitions do not happen, it will still be able to plough this cash very well. Please note that company’s RONW is excellent with over 25% despite higher cash and cash equivalents. Not many companies of this size have been able to maintain operating profit margin consistently above 30% and RONW above 25%. This shows excellent management bandwidth to navigate the uncertain business environment and yet be able to create value for investors. It is one of the few companies who have been paying consistent dividend (Rs 32 per share last year).
Risk Vs Returns favour returns
Looking at the valuations of the company I would assume that there is no substantial downside on the counter from the present level of Rs 2,223. But upside potential is at least 20% (around Rs 2,700) by March 2013. Please note that company’s market cap is Rs 1.25 lakh crore and looking at the balance sheet and management bandwidth it’s unlikely that market cap would take beating from this level.
So when domestic business scenario is uncertain its make sense to get into a company that has low downside risk but higher probability of capital appreciation. Also note that all negatives are already priced in and hence one is unlikely to see major shock value in the future. Any positive news would make the counter rally.
I would recommend Infosys share as a part of your core portfolio.
(Sunil Damania is an investment expert, and a former financial journalist with over two decades of experience)
Disclaimer: The author holds shares of Infosys.
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