Is Infosys worth investing in? A primer on the stock

Our large deals value for Q1 was at $2.3 bn – 56% of this was net new. This included one mega deal win. We also announced a mega deal with a value of $2 bn after the close of Q1, but before our results. With strong large deals and mega deal wins, we are building well for the future. We are delighted that Topaz, our Generative AI platform, is resonating well with our clients. We are working on 80 Generative AI projects for our clients at this time. The work we are doing, covers large language models for software development, for text, document, voice, and video

Mr Salil Parekh, CEO

Stock data

Price Performance:

Company description:

Infosys Limited is one of India’s largest and most prominent information technology (IT) services companies. Founded in 1981 and headquartered in Bangalore, India, Infosys has grown to become a global leader in IT consulting, technology, and outsourcing services. The company operates in various industry verticals and serves clients worldwide.

Business segments:

1. Consulting and Services:

Infosys offers a wide range of IT consulting and services, including application development, system integration, cloud computing, cybersecurity, and digital transformation. This segment forms the core of Infosys’ business.

2. Business Process Management (BPM):

Infosys provides BPM services to help clients streamline their business processes, improve efficiency, and reduce operational costs. This includes services like finance and accounting, customer service, and supply chain management.

3. Products and Platforms:

Infosys develops and markets software products and platforms designed to meet the specific needs of various industries. These products include Finacle (banking software), EdgeVerve (automation and AI solutions), and more.

4. Digital Services:

It comprises services and solution offerings of the group that enables clients to transform their businesses. It includes offerings that enhance customer experience, leverage AI-based analytics and big data, engineer digital products and IoT, modernize legacy tech systems, migrate to cloud applications and implement advanced cyber-security systems.

Business Model:

Infosys operates on a business model centered around technology innovation, client partnerships, and global delivery capabilities. Key aspects of its business model include:

1. Global Delivery Model: Infosys has a global network of delivery centers, enabling it to provide cost-effective services to clients around the world.

2. Innovation Labs: The company invests in research and innovation through its innovation labs, which focus on emerging technologies and their application to real-world business challenges.

3. Client-Centric Approach:

Infosys maintains strong client relationships and often collaborates with clients on long-term projects, fostering trust and mutual growth.

4. Talent Development:

The company places a significant emphasis on talent development and training to ensure a skilled and adaptable workforce.

Products and Platforms:

The company also offers various services through its key products and platforms viz. Infosys Finacle, Infosys McCamish, Panaya, Infosys Meridian, Helix, Equinox, Wingspan, Edgeverve, Stater and others.

Clientele:

As present, the company caters to ~185 of Fortune 500 companies. It has 38 of 100+ million USD clients, 64 50+ million USD clients, 275 10+ million USD clients, ~850 1+ million USD clients.Its clients include companies/ organizations like ICICI Bank, Daimler Mercedes-Benz, HSBC Bank, Goldman Sachs, J&J, Accenture, US Army, US Navy, Lockheed Martin, IBM Corporation, Deutsche Bank and others.

Employee Base:

As per FY22, the company has an employee base of ~3,15,000 employees. In FY22, over 1,40,000 employees joined the company out of which 80,000 were directly recruited from colleges.

Attrition Rate:

In FY22, the company witnessed a heavy employee attrition rate of ~28% compared to ~11% in FY21 and ~17% in FY20.

Leading Subsidiaries:

The group’s businesses are also handled through some of its leading subsidiaries :-

1. Infosys BPM Ltd (~5.5% of revenues) – It is the business process management (BPM) subsidiary of the Infosys Group engaged in providing end-to-end transformative Digital BPM services for global clients across various industries and service lines.

2. EdgeVerve Systems Ltd (~2.5% of revenues) – It is a global leader in AI, Automation and Analytics which helps businesses with their business processes, documents and supply chain.

Financials:

What we like:

1. Improved client engagement amid volatility:

Infosys continues to improve its customer relationships even in an unfavorable macroeconomic environment. Companies continue to rethink their cost structure and strengthen their business resilience amid the prevailing challenging macro scenario. They are also investing in technology to increase agility. Infosys continues to gain customer trust in services and execution to improve reliability.

2. Robust overall performance; BFSI moderated:

FY23 Revenue stood at Rs 1,46,767 Crore, reporting growth of 20.6% YoY. It reported operating margins of 21.1%, down 190 bps due to higher employee costs, higher travel costs, and higher subcontracting costs. Net profit stood at Rs 24,108 Cr, reporting growth of 8.8% YoY and a net margin of 18.2%. Cash conversion continues to be strong at Rs 38,660 Cr. Free cash flow stood at Rs 20,443 Cr, FCF conversion of 84.8% of the net profit.

3. Focus on strategic clients to provide long-term sustainable growth:

Infosys has specialized services in Cloud Computing, Digitizations, and Business Analytics, and has established leadership in Enterprise Software, Consumer Software, and Innovation Services. Furthermore, the company’s experienced management team is sharply focused on increasing wallet share from existing clients. It continues to witness good traction from top clients in adopting collaboration tools, cloud, and digitization. Although Top clients’ IT spending momentum and concentration remain high, the company is targeting lower client concentration. Moving forward, Infosys’s stable delivery capabilities coupled with strong deal wins are expected to accelerate its growth momentum

4. Diversified and strong presence across Geographies:

Infosys has a strong presence across geographies helping it reduce the geographical dependency. This makes its business model more resilient by reducing the impact of any local economy on the overall business.

5. Robust demand for digital services in the long term:

Uncertain macroeconomic conditions will lower short-term demand, but long-term demand for automation will remain strong. Infosys has a strong focus on digital services and has deep expertise in delivering these services within defined verticals. Digital revenue as a percentage of total revenue has grown meaningfully from 14% in Q1FY17 to ~62% in Q4FY23, reporting an impressive growth of 41.2% YoY. Management sees healthy growth in demand for digital transformation and digital business, especially in industries such as BFSI, Manufacturing, Retail, and Life sciences, where customers want customized development of newer technologies. Against this backdrop, Infosys is targeting double-digit revenue growth overall in FY23. The company’s strategy is to focus on IP-enabled offerings, digital transformation, software-based offerings and large enterprise accounts for its future growth.

Factors to consider:

1. The IT services industry is highly competitive, and Infosys faces competition from both domestic and international players.
2. As a global company, Infosys is exposed to currency exchange rate fluctuations, which can impact its revenues and profits.
3. Changes in U.S. immigration policies regarding H-1B visas can affect the company’s ability to send employees to the United States.

Conclusion:

Infosys Limited is a leading global IT services company with a strong track record of innovation and client partnerships. While it benefits from a diverse client base, technological expertise, and ethical practices, it operates in a competitive industry with potential risks related to currency fluctuations and immigration policies. Investors should conduct thorough research and consider the company’s financial performance and industry dynamics before making investment decisions. Staying updated on Infosys’ strategies and market trends is crucial for informed investing.