Case Analysis of Infosys Technologies | India | Accounting

Infosys Storms India’s billionaire bastion:

Times News Network [Wednesday, April 14, 2004 02:20:43 Am] – Banga­lore:

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Infosys Technologies today became India’s first listed IT company to touch the magical billion-dollar revenue mark by ending fiscal ’04 with Rs.4,760.89 crore or $1.08bn. To put it in perspective, five years ago in 1999, the company’s revenues were only $121m.

A proud Nandan Nilekani, the company’s managing director, president and CEO said- “Today we have the required size, brand, compelling value proposition and ambition to build the next generation software and consulting company”. He said, “A billion dollars in revenue with a 25% net margin is no mean achievement”. Infosys capped this happy news by seeing its net profit for the fourth quarter ended March 31, ’04 rising year-on-year by 30% touching Rs.337.05 crore.

Income from software development services and products in Q4 was up year on year 28% at Rs.1, 308.9 crore. For the full year ended March 31, ’04 Infosys had revenues of Rs.4, 760.89 crore, indicating a year on year rise of 31%, while net profit at Rs.1, 470.47 representing a jump of 26.8%.

On a sequential basis (comparing the fourth quarter with the third quarter ended December 31, 03). Infosys has seen its total income rise by a modest 6% at Rs.1, 308.9 crore (Rs.1, 235.26 crore), while net profit stood at Rs.337.05 crore (Rs.256.31 crore).

The Infosys board which gave the outlook for the current fiscal and first quarter ending June 30, 2004 (Infosys’ consolidated revenues which also includes its other subsidiaries like Progeon, and the Australia-based Expert Information System) expects its income to be in the range of Rs.5, 994-6,041 crore — a year-on-year growth of 24% — while earnings per share (EPS) is projected to be Rs.224 a year-on-year growth of 20%.

Infosys on a consolidated basis is expected to show revenues of Rs.1, 363- 1,371 crore for the first quarter of the current fiscal. For the last fiscal, Infosys had consolidated revenues of Rs.4, 852.95 crore while net profit was Rs.1, 243.63 crore.

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For Q4 the consolidated revenues were Rs.1, 349.45 crore while net profit was Rs.335.23 crore.

Infosys crosses $1 on mark, announces 3:1 bonus:

PTI [Tuesday, April 13, 2004 06:30:52 PM]- Bangalore:

Infosys Technolo­gies has become India’s first listed IT firm to have crossed $1 billion turnover, with revenues of Rs.4, 760.89 crore for 2003-04 and rewarded its shareholders with three bonus shares against each share held.

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Infosys recommended bonus shares of 3:1 that is three additional equity shares for each existing share with the shareholder by capitalising a part of its cash reserves.

The firm announced a final dividend of Rs.15 per share of Rs.5 and a special dividend of Rs.100 per share, a whopping 2,300 per cent of the share value of Rs.5. “Infosys has crossed a revenue of $ 1 billion and CEO Nandan Nilekarni and the team have got the same energy and enthusi­asm to continue and begin another journey,” said Infosys chief mentor and Chairman N.R. Narayana Murthy, who along with six friends started the IT firm in 1981 at Pune with a paltry investment of Rs.10,000 ($250).

Infosys reported a net profit of Rs.1, 243.47 crore, up by 25.7 per cent over the Rs.954.77 crore it reported last fiscal.

“We have grown from $ 121 million in 1999 to a consolidated revenue of $ 1.06 billion in 2004. Today, we have the required size brand, compelling value proposition and ambition to build the next generation software services and consulting company,” Infosys CEO, Nandan M Nilekarni, said.

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The IT bellwether gave a revenue guidance of Rs.5,994 crore and Rs.6,041 crore for 2004-05 (25 per cent growth) and an earning per share (EPS) expectation of Rs.224.

To solve this case the following data should be sourced:

1. Financial Statements of the company 2003-04, source: www(dot)infy(dot)com.

2. Shareholding pattern of the company, www(dot)nseindia(dot)com.

3. Bonus announcement, www(dot)nseindia(dot)com.

Hints:

1. Shareholders’ funds and dividend yield of Infosys:

As per Balance Sheet (31-3-2004) Infosys has 6,66,41,056 fully paid up equity shares, Rs.5 par value amounting to Rs.33.12 cr. of which 5,78,88,200 equity shares, fully paid up have been issued as bonus shares by capitalization of the general reserve.

Bonus Culture in Infosys

It shows that the company had earlier increased equity base to a great extent only by issuing bonus.

Given below in Table 8.2 is the position of free reserve of the company:

High Free Reserve of Infosys

With this high % of free reserve and other reserve (total reserves and surplus of Rs.3253.43 cr.), its dividend paying equity constitutes only 1.02%. Therefore, even a very high dividend of Rs.862.46 cr. works out to be only 26.51%. When computed with reference to its market value of Rs.5400, the dividend yield works out to be only 2.40%.

See Table 8.3 below:

High Dividend But Poor Yield

Effectively, from dividend payout shareholders cannot be benefited. It is market capitalization of the company that matters. Market price of Infosys has no relevance with its book value.

2. Dividend Payout:

Last year the company distributed only 19.95% including dividend tax. For celebrating its achievement of $1 billion sales and to uphold the principle of shareholders value creation, the company proposed to distribute 78.25% of current PAT. However, the company’s normal payout ratio is lower than 2002-03.

Infosys Maintained Normal Payout

Infosys wanted maintain a normal dividend payout around 17-18%. So it has termed its high pay out as one time special dividend. Although we have talked about irrelevance of high dividend payout in the context of very high market price of Infosys share, the attempt of the company to pay cash dividend has proved its attitude towards shareholders’ value. Moreover, cash flow from operating activities of the company is Rs.1633.97 cr. Therefore, it has good dividend coverage ratio.

Moreover, the shareholding pattern of Infosys shows substantial interest of the Institutional Investors (India and Foreign) and promoters. This might have influenced the decision of high pay out.

For shareholding pattern of the company see Table 8.5.

Shareholding Pattern of Infosys

Total Foreign Shareholding (including GDR) is 33818971 equity shares representing 50.89% of the total capital.

Source: www(dot)nseindia(dot)com

3. P/E Ratio:

While valuing Infosys stock, its average P/E ratio may be used. Given below is the P/E ratios of Infosys during 2003-04:

At the present level of earning, Infosys share can be valued at:

At the announced level of basic EPS of Rs.187, 38, average share price of Infosys should be Rs.5501 .Note that its closing share price aftermath the announcement of financial result as on the 13.4.2004 was Rs.5490.

On the basis of the projected EPS of the company, bonus equity price of the company may rise by Rs.1075, i.e. 20% above the average market price of Rs.5501.

4. Stock dividend:

Given below is the bonus announcement of the Infosys:

Stock dividend of infosys will be really meaningful in case the company is successful in maintaining more than proportionate value.

The expected stock price of Infosys is evaluated below at four different growth levels – Revenue growth of 10%, 15%, 20% and 25%. Of course, Infosys projected 25% revenue growth.

Expected Market Price at Different EPS Levels

PAT has been projected at current level of PAT% of 26.12% on revenue. It appears that the company needs in fact a 25% revenue growth to maintain the pre-bonus price level of equity. So the shareholders’ value maintenance as has been talked much in the Infosys profit distribution has underlying presumption of 25% revenue growth. It needs to be analyzed how far this growth assumption will be successful in view of the rupee appreciation against US$.

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