Infosys’ Q2FY2018 results are in line with the large peers in the industry – year-on-year growth in revenues and net profit stand at 1.5 per cent and 3.3 per cent respectively. TCS and Wipro have also posted poor single digit yoy growth in revenues or profits.
It is quite unfortunate that three key issues have been impacting the large IT companies including Infosys – first of all the ‘base effect’. Today India’s IT export basket of nearly $110 billion cannot maintain the kind of growth momentum the industry used to maintain in 1990s or a decade ago. IT export growth also got impacted by growing restrictive practices from the US government. The problems of the industry further compounded by appreciation of rupee in 2017 – so far in this year, rupee has appreciated by 4.5 per cent. Such significant appreciation of currency has partly led not only to Infosys’ revenue in rupee terms growing in poor single digit, but also significantly lower than the dollar revenue growth. Infosys has projected its dollar revenue to grow in the range of 6.5 per cent to 7.5 per cent in FY2018. In contrast, for the whole of FY2018, Infosys expects the revenues to grow in rupee terms merely at 3 per cent to 4 per cent.
However, Infosys remains as a solid cash cow – liquid assets including cash and cash equivalents stand at over Rs 41,000 crore. This cash forms 20 per cent of its current market cap. Lack of significant growth in earnings hasn’t deterred the company in increasing the dividends. It has hiked the interim dividend from Rs11 per share in FY2017 to Rs 13 per share now. It has made a net profit of over Rs 7,200 crore in the first half of FY2018. Even without any significant growth on sequential basis, Infosys can generate around Rs 14,000 crore of annual net profits and therefore, at least Rs 13,000 crore of cash per year.
Stock may not fall badly as there is no major deviation between the actual performance and the market expectations. However, poor single digit revenue and profit growth for all three IT majors (which have declared results so far) confirm the fact that “the wealth creation story” for the large IT stock is over in the short -to-medium terms. But Infosys can still remain as a defensive bet as a majority of the mid cap stocks are over-valued on the markets.
Theoretically, Infosys can repeat buyback of its shares to the extent of 5 per cent of its total equity every year, using incremental cash generation of around Rs 13,000 crore per year. The same would be EPS accretive and hence, at least profit per outstanding basis can grow faster than the poor single digit growth in total profits and thereby, improve the PE multiple on the markets. The PE of Infosys has shrunk to mere around 14 for FY2018 which is at significant discount to many mid-sized IT companies and also nearly half of its own valuation multiple it enjoyed some years ago!
Apart from the effective use of inherited and future cash for rewarding the investors, more concrete measures like reducing employee attrition, bringing stability in the leadership and possible inorganic route to grow (through acquisitions of mid-sized IT companies) could possibly help Infosys to gain back, at least partly, its glorious past market valuation.
G Chokkalingam is Founder & Managing Director at Equinomics Research & Advisory
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.