Valuation by
Tanushree Seth
Company Snapshot
Global Headquarters: Bangalore, India
Founded:
1981
Global Presence:
36 Sales Offices in 17 countries
37 Global Development Centers
Employees:
49,422
LTM Dec ’05 Revenue/ 5 Year CAGR: $2,014 million/ 41%
LTM Dec ’05 Net Income/ 5 Year CAGR: $530 million/ 37%
Company Statistics
Employer Type: Public Company
Stock Symbol: INFY
Stock Exchange: NASDAQ
Market Share price: $74.98*
Key Executives
President, CEO, MD: N. R. Narayana Murthy
Nandan M Nilekani
T. V. Mohandas
PaiS. Gopalakrishnan
V. BalakrishnanK.
DineshS. D
ShibulalSrinath Batni
*As of 4/14/2006
CEO, President
and MD: N.R.
Narayan Murthy
Outline
• Overview
• Investment Highlights
Business model
Investment positives
• Addressing Key market challenges: Risks
• Valuation
Estimated growth rates of 30% and 25%
• Comparable company analysis
• Recommendation
Overview
Smart investments
In 1999, the firm became the first Indian company to
list on NASDAQ
In 2002, Infosys started a recruiting and marketing
blitz
The firm registered sales of $740 million, up 50
percent over the previous year, 2002
In 2004, , the firm hit its first billion
Overview
The U.S. dream team
 The company turned its attention to the U.S. consulting market
in April 2004, forming Infosys Consulting
 Stephen Pratt, who was named CEO of the subsidiary; Romil
Bahl, former head of EDS' consulting practice; Pal Cole,
former head of global operations at CGE&Y; and Raj Joshi,
former CEO of Deloitte Offshore.
 In April 2004, the publication eWeek.com pointed out that the
move was a step toward competing in the U.S. consulting
market against the big guys like Accenture.
Moving forward

In 2003, Infosys launched a business-processing
subsidiary, Progeon, and secured a five-year, $30-million
contract from U.S. mortgage firm GreenPoint.

In November 2004, Infosys and Microsoft announced an
enterprise IT transformation initiative

In December 2003, the firm announced its intentions to
acquire Expert Information Services, an Australian IT services
firm, for around $23 million.
Infosys Work Culture
Open-door culture
Hard work, lots of passion
A piece of heaven in Bangalore
Investment Highlights
Large, Expanding Addressable Market
Highly-evolved Global Delivery Model
Rapid Differentiation
Scalable Execution
Exceptional Financial performance
Large, Expandable
Addressable Market
Offshore Outsourcing is a Mega Trend
Outsourcing benefits:
 Convert fixed costs to variable
 Reduce TCO, enhance ROI
 Improve competitiveness
800
700
$728.00 bn
$606.00 bn
600
Corporate IT
Services
Spending
500
400
Offshore benefits:
 Deliver high quality at great value
 Highly scalable with no foreseeable
supply constraints
 Proven track record
 Addressable market has increased
Offshore
Outsourcing IT
Services
Spending
300
200
100
$18.00 bn
$51.00 bn
0
CY 2004
CY 2007
India: #1 Offshore Destination
Corporate Executives’ Preferred
Destinations for Offshore IT Services
The India Advantage:
Strong Track Record
80%
80
70
•
•
•
•
•
•
•
High quality delivery
Significant costs benefits
Strong government support
Mature industry
Man Power
Education system
24 x 7 working model advantage
Source: Infosys: IDC Offshore Best Practices Enterprise Survey, 2004
60
50
40
20%
30
17%
17%
20
10
0
India
Canada
China
Ireland
Infosys is a Premier Global IT
Services Firm
Key competitive advantages
• Extensive domain knowledge and
expertise
• Comprehensive offerings
• Long-term relationships with blue
chip clients
• Proven Global Delivery Model
• Execution excellence
• Competent leadership and
management team
Source: Infosys and Gartner 2004
2500
$2,014.00
mm
2000
1500
Infosys Revenue
1000
$294.00 mm
500
0
LTM Sep ' 00
LTM Sep '05
5 year CAGR (LTM Dec 00-LTM Dec 05)
Global IT Services
India IT Exports
Infosys
5%
29%
41%
Business Model:
Highly-evolved Global
Delivery Model
Highly-evolved Global
Delivery Model
Stage 1
Client Requirements
Infosys Delivery
Stage 2
Stage 3
Run the
business
Grow the
business
Transform the
business
GDM
GDM+
GDM+
Consulting
Infosys’ Global Delivery Model
Management
Consulting
2005 ________
Business Process
Management
IT Outsourcing
Systems Integration
2001 ________________
Technology Consulting
Technology-enabled BPR
1996 ______________
Enterprise Solutions
Application Development and Maintenance
1981 ____________
Software Engineering
People|Organization|Infrastructure|Process|Quality
Infosys Global Delivery Model
Differentiation within
the IT industry
Uniquely Positioned in Global IT Services
and Consulting
IN PROCESS
• Consulting + Solution mindset
• Build stronger brand
• Strengthen Board-level relationships
NEED TO:
•
•
•
•
•
Replace resources
Overcome “offshore-is-cost-center” mindset
Combat revenue cannibalization
Provide seamless sales and delivery
Reduce SG&A
Applying GDM to Consulting
100
80
70
-----------------------------------------------------
-------|
90
Client Budget
35% lowering total cost
60
50
Business Change
40
IT Implementation
30
20
10
0
Traditional INFOSYS
Consulting consulting
Model
Significantly lower total cost
of engagement
Lower IT implementation
cost = flexibility in solution
delivery
Greater ability to invest in
managing business change
Drivers of Scalability
Superior Talent
Management
World Class Processes
and Systems
Flexible Organization
Structure
Modular and Robust
Global Infrastructure
LEADS TO
SCALABLE
EXECUTION
Scalable Execution
Superior Talent Management:
Hiring the Best
 Able to simultaneously evaluate
10,000 people across 7 cities in India
 Augmenting talent through new
geographies
 China, Eastern Europe
 Supplementing with experienced local
hires
 Currently hiring people 59
nationalities
World Class Processes and
Systems
Quality par excellence:
 Benchmarked to Global Standards such as
EFQM
Award-winning Knowledge Management
Processes
 PRIDE
 2004 Asian MAKE Award
Scalable Execution
Flexible Organization Structure
 Integrated platform for
delivery of end-to-end
solutions from Consulting to
BPM
Modular and Robust
Infrastructure
 37 Global Development
Centers (“GDC”)
 Ability to rapidly scale new
engagements
 Self-governed business units
 By domain
 By Market
 By Service
 Flexibility to distribute
engagements and capacity
across centers worldwide
Exceptional Financial
Performance
Superior Revenue Growth
Sustained Industry-leading
Profitability
Addressing Key Market Challenges
Challenges
Infosys Strategy
Competitive
• Pricing
• Onsite/offshore effort
• Investment in sales
and marketing
• Continue to penetrate high valueadd segments
• Leverage GDM+
• Enhance internal productivity
• Leverage economies of scale and
brand
Economic
• Wage inflation
• US$/Rupee exchange
rate
• Move to variable salary structure
and role-based compensation
• Proactively hedge currency
exposure
Valuation
Inputs:
Current EBIT =
Current Interest Expense =
Current Capital Spending
Current Depreciation & Amortization =
Tax Rate on Income =
Current Revenues =
Current Non-cash Working Capital =
Chg. Working Capital =
Cash and Marketable Securities
Value of equity options issued by firm =
Book Value of Debt =
Book Value of Equity =
$491,000,000.00
$0.00
$186,000,000.00
$66,000,000.00
14.66%
$1,592,000,000.00
$302,000,000.00
$152,852,304.00
$688,000,000.00
$52,000,000.00
$180,000,000.00
$1,253,000,000.00
Valuation
Market Value per share=
$75
Number of shares outstanding=
Market Value of Debt=
Length of extraordinary growth period=
Beta of the stock=
Risk Free rate=
Risk Premium=
Cost of Debt=
274,530,000
$180,000,000
10 years
2.03
4.86
6.60%
5.63%
Estimated Growth=
30%
Valuation
Outputs:
Return on capital=
Reinvestment Rate=
Cost of Equity=
Equity/(Debt+Equity)=
After-tax Cost of debt=
Debt/(Debt+Equity)=
WACC: 18.14%
27.20%
11%
18.26%
99.13%
4.80%
0.87%
Valuation
Current EBIT * (1 – tax rate)
- (Capital Spending – Depreciation)
- Change in WC
Current FCFF: $146,167,096.00
$419,019,400
$120,000,000
$152,852,304
NPV of FCFF
2006
2007
EBIT * (1 - tax rate)
$586,198,084.13
$820,077,050.95
- (CapEx-Depreciation)
$167,877,120.00
$234,856,061.83
-Chg. Working Capital
$120,490,752.00
$168,563,670.27
Free Cash flow to Firm
$297,830,212.13
$416,657,318.85
$252,096,381.22
$298,520,895.88
Present Value
NPV of FCFF
2010
2011
2012
2013
EBIT * (1 - tax rate)
$2,245,357,256.2
$3,141,200,912.8
$4,394,464,688.31
$6,147,750,631.7
- (CapExDepreciation)
$643,031,971.19
$899,586,294.92
$1,258,499,636.53
$1,760,610,787.5
-Chg. Working
Capital
$461,524,511.31
$645,661,714.74
$903,265,243.03
$1,263,646,396.6
Free Cash flow to
Firm
$1,140,800,773.7
$1,595,952,903.2
$2,232,699,808.75
$3,123,493,447.6
Present Value
$495,677,391.45
$586,958,282.56
$695,048,899.58
$823,044,817.93
NPV of FCFF
2014
2015
Terminal Year
EBIT * (1 - tax rate)
$8,600,555,587.86
$12,031,970,854.09
$12,633,569,396.79
- (CapExDepreciation)
$2,463,052,237.07
$3,445,750,966.40
$3,158,392,349.20
-Chg. Working
Capital
$1,767,810,981.38
$2,473,125,135.49
$0.00
Free Cash flow to
Firm
$4,369,692,369.41
$6,113,094,752.19
$9,475,177,047.59
$974,611,675.13
$1,154,090,149.91
Present Value
NPV of FCFF
Present Value of FCFF in high growth phase =
$6,052,135,216.05
Present Value of Terminal Value of Firm =
$13,612,066,744.99
Value of the firm =
$19,664,201,961.04
Cash and Marketable Securities =
$688,000,000.00
Market Value of outstanding debt =
$180,000,000.00
Market Value of Equity =
Value of Equity options issued by the company =
Market Value of Equity/share =
$20,172,201,961.04
$52,000,000.00
$73.29
Market Value at an estimated growth rate of 25%
Present Value of FCFF in high growth phase =
$
4,627,111,697.12
Present Value of Terminal Value of Firm =
$
8,458,660,426.31
Value of the firm =
$
13,085,772,123.43
Cash and Marketable Securities =
$
688,000,000.00
Market Value of outstanding debt =
$
180,000,000.00
Market Value of Equity =
$
13,593,772,123.43
Value of Equity options issued by the company =
$
52,000,000.00
Market Value of Equity/share =
$
49.33
Firm is overvalued
Competitive Landscape
Infosys Technologies (INFY)
Competitors:
•
•
•
•
•
•
•
•
Wipro (WIT)
HCL Technologies Ltd.
Satyam Computer Services (SAY)
Cognizant Technology Solutions Corp.
Syntel Inc.
Tata Consultancy Services Ltd.
i-flex
Patni Computer Systems Ltd.
Share Price
Comparable company analysis
Ticker
Company name
Symbol
Indian IT Services
vendors
Share
Price*
% of 52 week
Equity
high
market cap (2)
Book
value
Cash and
equivalents
($/shr)
(%)
($MM)
($MM)
($MM)
INFY
Infosys Technologies
(INFY)
$75.10
90.1%
$20,616.8
$1,639.0
$969.0
WIT
Wipro (WIT)
$14.50
93.6%
$20,649.3
$1,574.6
$773.8
629489
HCL Technologies
Ltd.
$13.47
85.0%
$4,335.6
$840.8
$441.8
SAY
Satyam Computer
Services (SAY)
$38.71
87.0%
$6,268.4
$914.8
$472.0
*Share price as per 4/10/2006
(2)
Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market
capitalization plus total debt and other value, less cash and equivalents.
Comparable company analysis
Company name
Indian IT Services vendors
Cash %
Total Debt
of market
cap
(%)
($MM)
Enterprise
Revenue
EBITDA
Value (2)
FY 07
FY 08
CY 06
($MM)
($MM)
($MM)
($MM)
($MM)
Infosys Technologies (INFY)
4.7%
$0.0
$19,660.8
$2,622.5
$3,320.0
$846.7
$1,055.9
Wipro (WIT)
3.7%
$32.3
$19,907.8
$2,886.8
$3,613.7
$689.0
$841.3
10.2%
$41.2
$3,937.5
$1,117.8
$1,418.0
$255.4
$319.1
7.5%
$16.9
$5,834.2
$1,343.6
$1,703.2
$300.1
$377.8
HCL Technologies Ltd.
Satyam Computer Services
(SAY)
Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market
capitalization plus total debt and other value, less cash and equivalents.
(2)
CY 07
Comparable company analysis
Company name
Indian IT Services vendors
Enterprise Value/Revenue
Enterprise Value/EBITDA
FY 07
FY 08
FY 07
FY 08
(x)
(x)
(x)
(x)
Infosys Technologies (INFY)
7.5 x
5.9 x
23.2 x
18.6 x
Wipro (WIT)
6.9 x
5.5 x
28.9 x
23.7 x
HCL Technologies Ltd.
3.5 x
2.8 x
15.4 x
12.3 x
Satyam Computer Services (SAY)
4.3 x
3.4 x
19.4 x
15.4 x
Comparable company analysis
Company name
Earnings per share
Price/Earnings
Indian IT Services vendors
FY 07
FY 08
FY 07
($/shr)
($/shr)
ratio
Long-term
PEG
FY 08
Growth rate
FY 07
FY 08
(x)
(x)
(%)
(x)
(x)
Infosys Technologies (INFY)
$2.38
$2.87
31.6 x
26.2 x
29.4%
1.1 x
0.9 x
Wipro (WIT)
$0.38
$0.46
37.9 x
31.6 x
23.4%
1.6 x
1.4 x
HCL Technologies Ltd.
$0.54
$0.62
25.2 x
21.6 x
NA
NA
NA
Satyam Computer Services
(SAY)
$1.54
$1.85
25.2 x
20.9 x
21.5%
1.2 x
1.0 x
Recommendation:
Buy at low
Thank you!