Monday, September 3, 2007

Stock of the week: Infosys Technologies Limited

Introduction:

Infosys Technologies Limited is one of India’s largest IT companies. It has presence in nearly every division of IT services industry. It is more popular to among Indian investors for its “bonus” shares. Probably no other Indian company has issued as many bonus shares as Infosys. After the dot.com boom many IT companies witnessed fall in their stock prices. Infosys too, was affected badly between 2000 and 2001. But unlike other companies it has managed to bounce back and even go past beyond its previous high prices.

Infosys campus

Let us now analyze India’s No.2 IT company from a financial and stock market point of view.

Brief History:

Infosys was founded by N.R. Narayana Murthy, Nandan Nilekani and five others at Pune in 1981. It is said that Narayana Murthy borrowed Rs.10,000/- from his wife to start the company. In 1983 Infosys had moved to Bangalore. By 1998, it was about to become bankrupt but Naryana Murthy had faith in his vision. In the 90’s Infosys went public and the money started pouring in. Today, its revenues have crossed USD 3 billion and market capitalization is about USD 30 billion. There are more than 75,000 employees world wide.

Narayana Murthy is currently the Chairman and Mentor of the board and Nandan Nilekani is the Co-Chairman of the board of directors.

Business Profile:

Infosys and its subsidiaries provide end-to-end business solutions that leverage technology. The company provides solutions that span the entire software life cycle encompassing consulting, design, development, software re-engineering, maintenance, systems integration, package evaluation and implementation and infrastructure management services. Apart from this, the company offers software products for the banking industry (Finacle) and business process outsourcing/management services.

Some of the industries that are served by Infosys are given below:

  • Aerospace and Defense
  • Banking / Capital markets
  • Communication Services
  • Education
  • Healthcare
  • Hospitality and Leisure
  • Insurance
  • Media / Entertainment
  • Retail
  • Transportation

Infosys has developed Finacle, a system that interconnects several banking requirements from a single platform. This modular solution addresses the core banking, treasury, wealth management, consumer and corporate e-banking, mobile banking and web based cash management requirements of retail, corporate and universal banks worldwide.

In 2001 Infosys was rated "Best Employer in India" by Business Today and in 2002 Business World named it "India's Most Respected Company".

Stock market performance:

Infosys is a constituent of BSE Sensex (Free float market capitalization: Rs.90,068 crores and weightage : 8.97%) and Nifty (FFMC : Rs.112,860 crores and weightage : 4.78%). It is also listed at NASDAQ (Symbol : INFY).

Infosys had come out with an IPO in 1993 at an offer price of Rs.95. It was listed at a premium of Rs.50. It may be noted that IT was not the hottest sector in those days. Infosys has issued bonus shares on five occasions after listing (once 3:1 and rest 2:1). Its face value was split once, from Rs.10 to Rs.5.

According to the data available at the NSE web site, after adjusting for stock split and bonuses, it closed at Rs.7.03 on November 3, 1994. On August 31, 2007 it closed at 1855. Its highest ever close though, was 2383 on February 15, 2007. This means that the stock had gained 339 times in 13 years.

Infosys has performed very well in the last 5 years. The sales turnover has gone up by 3.6 times while net profit has gone up by 3.9 times.

The following chart indicates EPS and book value for the corresponding period. Please note that 3:1 bonus was issued in 2004; this was followed by another 2:1 bonus issue in 2006.

The monthly chart of INFY at NASDAQ is shown below. It can be seen that the ADR is making higher highs and higher lows; so it is still bullish on long term charts. However, it did not close above the 61.8% retracement level (a key resistance) at 60.78. Once this level is breached, it can possibly test its all time high at 93.75; but for that it has to nearly double from its current close at 47.71.

Data Source: Google Finance

But the Indian investors think differently. Let us see the monthly chart of INFOSYSTCH at NSE shown below.

Infosys has obviously made higher highs and higher lows; it is currently on its 4th wave. The previous resistance at 1741 should act as a support for the stock. The very fact that it has taken 6 years to break its resistance indicates that the stock is bound for another upmove. Long term investors, may continue to hold this stock.

Both weekly and daily charts are displayed above. Infosys continues to make lower highs and lower lows in both medium and short term charts. This is a sign of bearishness. Until the stock turns bullish in daily charts the short term investors should refrain from entering long positions; so is the case for medium term investors till it becomes bullish in weekly charts.

Conclusion:

Infosys has given huge returns (in the form of dividends, bonus shares etc.) to its investors. The same trend is likely to continue. However, the current technical scenario does not favour taking fresh positions; the market is probably concerned about exchange rates, over which the company does not have any control. But the long term investors can remain invested in the stock for some more time.