• you will choose one U.S publicly traded firm to analyze. You may choose any fi
ID: 2797775 • Letter: #
Question
• you will choose one U.S publicly traded firm to analyze. You may choose any firm that you like or dislike, although I would suggest you avoid firms in the financial services industry (e.g. banking, insurance) as these types of firms have unique accounts and financial reporting issues that we do not cover in class.•Each group is required to present their analysis of the firm in class and submit a project write-up.
•Your presentation and project write-up should include the following three parts:
1)A business analysis, which includes an analysis of a.the primary industry or industries in which the firm operates b.the firm’s business strategies c.the economy-wide factors, industry-wide factors and company specific factors that may affect the firm’s performance.
2)A financial analysis, which includes component percentage analysis and ratio analysis (e.g. profitability, turnover, liquidity, and solvency etc.) based on the firm’s most recent annual financial statements.
3)A brief investment recommendation: would you recommend buying or selling the stocks of the firms based on the analysis that you performed and its current valuation. • you will choose one U.S publicly traded firm to analyze. You may choose any firm that you like or dislike, although I would suggest you avoid firms in the financial services industry (e.g. banking, insurance) as these types of firms have unique accounts and financial reporting issues that we do not cover in class.
•Each group is required to present their analysis of the firm in class and submit a project write-up.
•Your presentation and project write-up should include the following three parts:
1)A business analysis, which includes an analysis of a.the primary industry or industries in which the firm operates b.the firm’s business strategies c.the economy-wide factors, industry-wide factors and company specific factors that may affect the firm’s performance.
2)A financial analysis, which includes component percentage analysis and ratio analysis (e.g. profitability, turnover, liquidity, and solvency etc.) based on the firm’s most recent annual financial statements.
3)A brief investment recommendation: would you recommend buying or selling the stocks of the firms based on the analysis that you performed and its current valuation. • you will choose one U.S publicly traded firm to analyze. You may choose any firm that you like or dislike, although I would suggest you avoid firms in the financial services industry (e.g. banking, insurance) as these types of firms have unique accounts and financial reporting issues that we do not cover in class.
•Each group is required to present their analysis of the firm in class and submit a project write-up.
•Your presentation and project write-up should include the following three parts:
1)A business analysis, which includes an analysis of a.the primary industry or industries in which the firm operates b.the firm’s business strategies c.the economy-wide factors, industry-wide factors and company specific factors that may affect the firm’s performance.
2)A financial analysis, which includes component percentage analysis and ratio analysis (e.g. profitability, turnover, liquidity, and solvency etc.) based on the firm’s most recent annual financial statements.
3)A brief investment recommendation: would you recommend buying or selling the stocks of the firms based on the analysis that you performed and its current valuation.
Explanation / Answer
Industry Information and Company Profile
Informational technology in India is an industry consisting of two major components; IT Service and Business Process Outsourcing (BPO). This sector has increased its contribution to India GDP from 1.2% in 1998 to 9.5% in 2015 According to NASSCOM, the sector aggregated revenues of US$ 147 billion in 2015, where export revenue stood at US$ 99 billion and domestic at US$48 billion growing by 13%.
Infosys Limited (Formerly Infosys Technologies Limited) is an Indian multinational corporation, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. The company offers business information technology services, including application development and maintenance, independent validation, infrastructure management, business process management, and engineering services consisting of product engineering and life cycle solutions; and consulting and systems integration services comprising consulting, enterprise solutions, systems integration, and advanced technologies. Infosys Limited serves clients in financial services and insurance; manufacturing and Hi-tech; energy, communications, and services; utilities; retail, consumer packaged goods, and logistics; and life sciences and healthcare industries. Infosys Limited was formerly known as Infosys Technologies Limited and changed its name to Infosys Limited in June 2011. Infosys Limited was founded in 1981 by seven people with US$ 250 and is headquartered in Bengaluru, India.
According to Gartner, Infosys is one of Top five Indian IT service providers along with Tata Consultancy Services, Cognizant, Wipro and HCL Technologies. The company has more 200,000 employees all over the world. The market capitalization of Infosys Limited is around the US $ 35 billion.
Profitability Analysis
Consolidated Profit & Loss Infosys Technologies Limited
(Rs in Cr)
Mar' 16 Mar' 15 Mar' 14
Income :
Operating Income 62,441.00 53,319.00 50,133.00
Expenses
Material Consumed 41.00 44.00 30.00
Manufacturing Expenses 6,101.00 3,855.00 3,656.00
Personnel Expenses 34,418.00 29,802.00 28,831.00
Selling Expenses - - -
Administrative Expenses 4,761.00 4,747.00 4,235.00
Expenses Capitalized - - -
Cost Of Sales 45,321.00 38,448.00 36,752.00
Operating Profit 17,120.00 14,871.00 13,381.00
Other Recurring Income 3,128.00 3,430.00 2,664.00
Adjusted PBDIT 20,248.00 18,301.00 16,045.00
Financial Expenses - - -
Depreciation 1,266.00 1,017.00 1,317.00
Other Write-offs - - -
Adjusted PBT 18,982.00 17,284.00 14,728.00
Tax Charges 5,301.00 4,911.00 4,072.00
Adjusted PAT 13,681.00 12,373.00 10,656.00
Non-Recurring Items - - -
Other Non-Cash adjustments - - -
Reported Net Profit 13,678.00 12,372.00 10,656.00
Earnings Before Appropriation 50,164.00 43,826.00 36,697.00
Equity Dividend 5,542.00 5,090.00 3,605.00
Preference Dividend - - -
Dividend Tax 1,134.00 1,034.00 615.00
Profitability Ratio
Infosys Limited TATA Consultancy Services Limited
2016 2015 2014 2016 2015 2014
Gross Profit Margin 27.42% 27.89% 26.69% 28.16% 25.87% 30.75%
Net profit Margin 21.91% 23.20% 21.26% 22.36% 20.97% 23.43%
ROCE 27.61% 25.30% 24.21% 38.87% 42.20% 41.87%
FY16
Gross profit margin has been dropped by0.45%, however, the margin band set by the company is between 24% to 26% and the Gross profit margin of the company is way above the standard set by the company. As per Mr. Ranganath D. Mavinakere (CFO Infosys Limited) the decline in the gross profit margin due to decline in the pricing, which is 1.1% in constant currency term on full year basis. This year company has increased its revenue by 17.11%.
FY15
Gross profit margin has been increased by merely 1.20%, however, the margin band set by the company is between 24% to 26% and the Gross profit margin of the company is way above the standard set by the company. This year company’s revenue growth was 6.36%
FY14
Gross profit margin was for the financial year 2013-14 was 26.69%, however, the margin band set by the company is between 24% to 26% and the Gross profit margin of the company is way above the standard set by the company.
Liquidity Analysis:
Consolidated Balance Sheet Infosys Technologies Limited
(Rs in Cr)
Mar' 16 Mar' 15 Mar' 14
SOURCES OF FUNDS
Owners' Fund
Equity Share Capital 1,144.00 572.00 286.00
Share Application Money - - -
Preference Share Capital - - -
Reserves & Surplus 56,682.00 50,164.00 44,244.00
Loan Funds
Secured Loans - - -
Unsecured Loans - - -
Total 57,826.00 50,736.00 44,530.00
USES OF FUNDS
Fixed Assets
Gross Block 20,633.00 17,769.00 13,902.00
Less: Revaluation Reserve - - -
Less: Accumulated Depreciation 7,453.00 6,423.00 5,524.00
Net Block 13,180.00 11,346.00 8,378.00
Capital Work-in-progress 960.00 776.00 961.00
Investments 1,892.00 2,270.00 4,331.00
Net Current Assets
Current Assets, Loans & Advances 59,109.00 51,897.00 43,296.00
Less : Current Liabilities & Provisions 17,315.00 15,553.00 12,436.00
Total Net Current Assets 41,794.00 36,344.00 30,860.00
Miscellaneous Expenses not written - - -
Total 57,826.00 50,736.00 44,530.00
Note
Book Value of Unquoted Investment 286.00 942.00 2,887.00
Market Value of Quoted Investment - - -
Contingent liabilities 1,905.00 1,881.00 1,582.00
Number of Equity shares outstanding
(in Lacs) 22,856.21 11,428.05 5,742.36
Liquidity Ratio
Infosys Limited TATA Consultancy Services Limited
2016 2015 2014 2016 2015 2014
Current Ratio 3.36 3.41 3.70 2.27 2.81 3.18
Quick Ratio 3.34 3.38 3.65 2.24 2.78 3.18
Current Ratio:
Infosys: Infosys Current ratio for the year 2016, 2015, and 2014 is 3.36, 3.41, and 3.70 respectively. This current ratio shows the financial stability of the company. Indian IT companies are sitting on a huge cash-pile. Alone Infosys has more than US$4 billion.Infosys Limited has a current ratio of 3.36. It indicates the company may not be efficiently using its current assets or its short-term financing facilities. This may also indicate problems in working capital management.During the past 13 years, Infosys Limited's highest Current Ratio was 10.39. The lowest was 3.54. And the median was 5.83.
TCS: Current ratio of Tata Consultancy Services for the year 2016, 2015, and 2014 is 2.27, 2.81, and 3.18 respectively. This is due to huge cash they have.
Quick Ratio:
Infosys: Infosys quick ratio for the year 2016, 2015, and 2014 is 3.34, 3.38, and 3.65 respectively. This quick ratio shows the financial stability of the company. Indian IT companies are sitting on a huge cash-pile. Alone Infosys has more than US$4 billion.
TCS: Quick ratio of Tata Consultancy Services for the year 2016, 2015, and 2014 is 2.24, 2.78, and 3.18 respectively. This is due to huge cash they have.
Leverage Ratio:
Infosys Limited TATA Consultancy Services Limited
2016 2015 2014 2016 2015 2014
Owners funds as % of total Source 100% 100% 100% 99.72% 99.45% 99.79%
Assets Turnover Ratio 1.03 1.05 1.13 1.64 1.64 1.68
Infosys Limited's current portion of long-term debt for the quarter that ended in Dec. 2016 was $0 Mil. Infosys Limited's long-term debt for the quarter that ended in Dec. 2016 was $0 Mil. Infosys Limited's total equity for the quarter that ended in Dec. 2016 was $9,644 Mil. Infosys Limited's debt to equity for the quarter that ended in Dec. 2016 was 0.00.
A high debt to equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Infosys is called debt free company and the same is reflected by their ratios.
Investor Analysis:
Infosys Limited TATA Consultancy Services Limited
2016 2015 2014 2016 2015 2014
Earnings per share 73.58 113.86 107.67 124.04 105.43 99.69
Share Price 1218.30 2218.36 3282.80 2520.30 2553.95 2133.15
Price Earnings Ratio 16.56 19.48 30.49 20.32 24.22 21.40
As of 31st March 2016, Infosys Limited's share price was 1218.30. Infosys Limited's diluted earnings per share for the twelve months ended in March 2016 was 73.58. Therefore, Infosys Limited's P/E ratio for today is 16.56.
During the past 13 years, the highest P/E Ratio of Infosys Limited was 41.04. The lowest was 11.26. And the median was 19.79.Price Earnings Ratio of Infosys Limited for the year 2016, 2015, and 2014 was 16.56, 19.48, and 30.49 respectively. It is important to note that 2-Dec-2014 and 15-Jun-2015, Infosys has split has its share 2/1.
Earnings per share of Infosys Limited for the year 2016, 2015, and 2014 was 73.58, 113.86 and 107.67. The decrease in earnings per share in the year 2016 is due to share split in the same year.
Payout Ratio:
Infosys Limited TATA Consultancy Services Limited
2016 2015 2014 2016 2015 2014
Dividend payout Ratio (Net Profit) 48.81% 49.50% 39.60% 42.09% 91.22% 36.91%
Earning Retention Ratio 51.19% 50.50% 60.40% 58.06% 7.47% 63.41%
For the year ending March 2016, Infosys has declared an equity dividend of 485.00% amounting to Rs 24.25 per share. At the current share price of Rs 1218.30, this results in a dividend yield of 2%.
The company has a good dividend track report and has consistently declared dividends for the last 5 years.
Company Specific factors:
• Leadership in sophisticated solutions that enable clients to optimize the efficiency of their business.
• Global and 24/7 delivery capability - excellent internet backbone and telecommunications facilities enabling companies to develop 24/7 delivery capabilities from India itself
• Commitment to superior quality and process execution - Infosys has quality standards such as CMM Level 5i to differentiate from other competitors
• Strong Brand and Long-Standing Client Relationships
• Status as an employer of choice
• Ability to scale
• Innovation and leadership.
• Cost advantage - Presence of Infosys in India is key to its success
• The breadth of service offering - end to end solutions including high-end services like IT consultancy and KPO.
Economic factors
While discussing PEST analysis of Infosys Limited secondly I discuss economic aspect of PEST analysis of Infosys Limited
• The positive aspects of the economic analysis of Infosys Limited are;
o Domestic IT Spending (Demand): Domestic market to grow by 9% and reach approx. USD 52 billion in 2015-16 - NASSCOM.
o The decline in real estate prices has resulted reducing the rental expenditures and due to the recession, the layoffs and job cuts have resulted in low attrition rate.
o Along with that economic attractiveness due to cost advantage and other factors is also a positive factor.
• The negative aspect of the political analysis of Infosys Limited is of global IT spending trends. Gartner says Global IT spending to reach $ 3.5 Trillion in 2017. However, the increase in IT spending in the year 2016 and 2017 were -0.3% and 2.9% respectively.
Industry factors:
o Telephony that is India has the world's lowest call rates (1-2 US cents). India has total subscriber base of about 616 million as of 2017. ARPU for GSM is USD 6.6 per month.
o India has the second largest telephone network after china. Tele-density - 19.86 %. Indian technology also gives a chance to enterprise telephone services, 4G LTE, 3G, Wi-max and VPN are poised to grow.
o Another positive aspect of Indian technology is the Internet Backbone. Due to IT revolution during the 1990s, Indian cities and India is well connected with undersea optical cables. Along with that new IT technologies like SOA, Web 2.0, High-definition content, grid computing, etc. and innovation in low-cost technologies is presenting new challenges and opportunities for Indian IT industry.
Conclusion and Recommendations
Infosys Limited holds a major share in Indian IT Industry. However, its performance in the year 2016, 2015, and 2014 was good except few instances. In the year 2016, operating profit margin of the company dropped by 0.47% due to decrease in pricing by 1.1% on constant currency term. This shows that there is pressure for price decline in the industry to gain contract.
However, the Operating margin of Infosys Limited is around 29.05% for the quarter ended on Dec 2016 and it is expected to stay that way. Net profit margin for the quarter ended on Dec 2016 is around 22.84%. Both ratios is within the expected profit margin.
India’s software services industry, already facing pressures on profitability and revenue, has become the latest target of the Trump administration’s moves to protect American jobs.
Recently The US administration said that it had drafted an executive order to overhaul the H1B work-visa program that software services firms based in India use to send skilled workers to the US. Some of the proposed changes are:
• Doubling minimum salaries of H-1B visa holders to $130,000
• Earmark 20% of H-1B visas for small and start-up employers
• Remove ‘per country’ cap for employment visas to ensure equal distribution
• Firms hiring H-1B visa holders need to make a “good faith” effort to recruit Americans first
• Give preference to students educated in the US for H-1B visas rather than computerized lottery system
• Crack down on outsourcing companies that import workers for temporary training and then send them back home to do the same job
• Prohibit spouses of H-1B visa holders from working in the US
• Prohibit companies with more than 50 employees, of which at least half are H-1B or L-1 holders, from hiring additional H-1B employees
• Strict audit and vetting by Department of Labor to clamp down on fraud or misuse
These changes will have an impact on Indian IT companies like Infosys, which has around 30% of its workforce in Onsite and particularly more than 20% of total workforce in the US.
Recommendations:
• Currently company‘s ADR is traded at $ 15.69 with PE 15.91. This is less expensive considering the company’s growth potentials and market dominance. We recommend Buy.
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