Is Infosys Technologies Ltd’s premium valuation justifiable at a time when peers such as Tata Consultancy Services Ltd and Satyam Computer Services Ltd are growing at faster rates?
Infosys trades at a 14% and 20% premium respectively to TCS and Satyam, based on the trailing price-earnings multiple. While Satyam is facing margin pressure, TCS could well beat Infosys even in terms of earnings growth this fiscal.
But it’s perhaps time to get over the fixation with reported earnings. What matters more is the cash being generated from operations. Ultimately, the value of the company is the sum of its cash flows. Also, looking at cash flow makes immense sense because it’s not as easy to manipulate as earnings are. Accounting norms such as revenue recognition and depreciation policy vary across companies and one may not necessarily be comparing apples with apples in the case of reported earnings. But what flows in and out of the cash flow statement is much more generic.
It turns out Infosys was the only company among top-tier IT companies to grow its cash flow from operations at a rate higher than earnings growth in the six months till September, thanks to a tight leash on receivables.
The company’s cash flow is now even higher than that of its larger competitor, TCS. On a trailing 12-month basis, Infosys’s cash flow from operations was 12.3% higher, while free cash flow, after deducting capital expenditure and the cost of acquisitions, was 4% higher than that of TCS. Note that in terms of revenues, TCS is about 36% bigger in size.
TCS also managed to grow cash flow, but at a rate lower than the rate of earnings growth, because receivables and the quantum of unbilled revenues continued to mount. Wipro Ltd and Satyam fared much worse, reporting a drop in both cash flow from operations and free cash flow.
Based on the price-to-cash flow ratio, Infosys is now among the cheapest IT stocks, at least within the top tier. It trades at 25.2 times trailing 12-month cash flow from operations, 8.5% lower than TCS’s valuation and 23.5% lower than that of Satyam. Its free cash flow yield is also the highest among the top four in the sector.
Clearly, the market has completely ignored these valuable tools. Infosys has been the worst performing stock among top-tier IT companies since the current results season began on 11 October. While its revenue growth has lagged some of its peers, it has delivered robust cash flow. It has also held on to its premium profit margins—in the first six months till September, its net margins were 370 and 690 basis points higher than that of TCS and Satyam respectively.
In spite of advances growing at a tepid 11.64% year-on-year and in spite of the net interest margin falling from 2.76% to 2.56%, Union Bank of India’s net profits rose by 42.27% to Rs276 crore in the September quarter. Growth in net interest income has been a mere 7% and the chief reason for the rise in profits stems from the 77% rise in non-interest income. Operating costs have been contained, with the y-o-y increase being 9.8%.
The bank will have to accelerate loan growth substantially if its target of 25% growth in advances for the year is to be met. The management feels that’s achievable, on the back of higher SME and retail advances. The bank is also targeting a net interest margin of 3%, mainly by lowering its cost of deposits—the bank lowered its deposit rates on Wednesday—and by increasing the proportion of current and savings bank accounts, which were a comparatively low 32.5% of total deposits at the end of September. Moreover, the growth in non-interest income will be a big contributor, with the management saying that it’ll grow by at least 50% this year. And finally, the cost to income ratio is also targeted to come down to 41% by March 08. With book value per share at Rs103.56 at the end of September and the scrip priced at around Rs160, the stock is cheap relative to peers.
Deepak Fertilisers and Petrochemicals Corp. Ltd (DFPCL) has posted a marginal rise in sales for the September quarter, primarily due to lower fertilizer sales.
Reduced availability of phosphoric acid, a key raw material, in the international market hit fertilizer sales. On the profit front, however, the situation was exactly the reverse, with a sharp drop in margins in the chemicals segment contributing to lower profits in the business. This was primarily due to the need to buy ammonia as the company’s ammonia plant was being retrofitted.
Net losses in the fertilizer division, however, were reduced.
Together with higher other income, the upshot was a 32% rise in profit before tax to Rs32.28 crore.
DFPCL’s promise, however, lies in the near future. Global methanol prices bottomed out during the second quarter and are currently on an upswing that could hold for several weeks. The high-margin Isopropyl alcohol business will continue to grow as capacity utilization improves.
Natural gas supply to the Company’s Taloja plant is expected to substantially improve from end-Q3 2007-08 with the last mile connectivity to the Taloja plant from GAIL’s Dahej-Uran pipeline nearing completion.
Tie-ups for additional natural gas supplies are in the final stage of negotiation. This will substantially enhance capacity utilization, which is currently less than 70% because of lack of gas availability.
Work is underway on a storage tank for ammonia that will enable the company to decide whether to buy or make ammonia depending on its price.
And finally, revenues from the company’s super-specialty mall Ishanya should soon start trickling in.
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