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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.


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