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Infosys Fourth Quarter Earnings Analysis

From it’s fourth quarter results, Infosys made profits of Rs. 1,144 crore in the fourth quarter versus 983 crore in the previous year, a growth of 16.38% YoY.

Annual profits are up about 52%, to 3500 crores. This is pretty good, considering that last year it said this:

Nasdaq-listed Infosys forecast earnings per share would rise 26 to 28 percent in the April-June quarter [2006] from a year earlier, a growth rate it expects to show for the full year.

It predicted 26-28 percent and it made 52% instead. The guidance is terribly conservative, it seems.

What have they said going forward? That they will earn 20-22% in rupee terms. The dollar value of earnings will rise about 25-28% though. So the rupee earnings is lower due to the rise in the rupee, soemthing that seems to severely impact earnings (upto 5%).

Further the drop in earnings , says Nandan Nilekani, because nearly 1.3 crore shares have been issued as conversion of ESOPs (due to unfavourable FBT laws applicable from April) which translates to a 3% dilution.

Now given that a) Infy always overperforms its guidance, sometimes ridiculously so and b) share dilution is a one time event, the longer term growth of this company can be estimated at 30%. That’s about an earning of Rs. 88 per share. At the current price of Rs. 2100 or so, the forward P/E is about 23. That’s a good value for now. If you consider a long term growth of around 30%, there is ample room for growth in this stock.

The downside: The Rupee, which they have worked out at Rs. 43.1 per share, may appreciate much more, hurting earnings. Inflation statistics show a less than 6% inflation recently, but the fight against inflation is a concerted exercise that will still hurt the dollar against the rupee.

Also, the financial services sector in the US which is a substantial chunk of Infy’s earnings, has been showing signs of slowing down.

Overall, I like the earnings that have happened, and feel good about the company going forward. But I would say wait till the TCS earnings are out on Monday, before deciding which one to buy.

  • sushanth says:

    >Hey Deepak,

    A question not related to this post.

    Do you have any suggestions for good fund picking for a long time span to be given as a gift? Is is better to stick to a diversified fund?
    Can I buy a fund under someone else name, say a minor?

    Thank you.

    -Sushanth

  • Deepak Shenoy says:

    >Sushant: According to http://www.personalfn.com/tax/faqmf.html Gifts are possible and even tax exempt on donation.

    I guess you can buy it under someone else’s name – but I’m not sure how it will work for signatures and pan numbers and such. Probably an advisor can help with that.

  • ven1977 says:

    >Eagerly waiting for your post on stock picking.
    Do you go by ‘value’ picking strategies or traditional ‘growth’ picking.

  • sushanth says:

    >Deepak,

    Do you track Alok Industries? Their customer list includes the big retailers of US and they seem to be expanding to become one-stop shop for any garment retailers.
    Do you have any technical information on it to make a informed decision for long term?

    Thank you.

  • Deepak Shenoy says:

    >sushant: Have heard a lot about this stock. Sounds quite interesting and textiles have got a raw deal recently. Maybe an interesting contra pick. Have to analyse more and get back.

  • Sujit says:

    >Hi Deepak,

    Infosys has declared a dividend of Rs.6.5 . Now lets say I own N shares of Infosys then how does that reflect on my shares, do they increase in value by 6.5??

  • Deepak Shenoy says:

    >sujit: dividend does not necessarily increase a company’s price, but on the record date it will REDUCE the price by teh amount of dividend (assuming that post that date, company is valued at that much lesser). So on the record date, INFY’s price will go down Rs. 6.5 – but it has already gone up quite a bit so you can assume that the dividend is factored into today’s price.