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The average holding period in any business we have invested in the last 5 years is 3 years. We do not like to trade too often and make our brokers rich rather prefer making money for our clients. Before I start sharing my views on Infosys, it is important to disclose that this article will only help investors and not the traders who are looking to profit from it in the short term.

Almost two and a half months ago I shared my views about Infosys on this blog (click here). I want to start this article by asking a question to two different investors and request them to give me the answer after reading the post. First, to the investors who bought Infosys shares at Rs 3,500 range two months back, what was your rationale behind investing at that time with Infosys? Second, to investor who is looking to invest with this business around Rs 3,000, what is their rationale behind investing with Infosys at those level?

If your investment horizon to stay invested is less than 3 years than there is a big probability that you will burn your capital or will accomplish a very ordinary returns on your investments. Investments in equity reap prosperous profits if they are intended to invest for long term.

There is a very simple formula to make money in this world for anything, higher the price you pay then lower is your return and lower the price you pay the higher is your return.

If you know estimate of a fair value, you can judge whether you are paying premium price or the discounted price.

Now, Infosys has given a better result compare to its last year performance. It was already investment grade business (A2) and after reporting its full year performance now it has improved its quality to A1 business. We love A1 businesses, but only when they are available at discount or close to its fair value.

Revenues from operations have gone up by 24% but the large part of it is due to the currency fluctuation we have seen in the last year. The biggest expense of Infosys business is ‘Employee benefit expenses’ which chew up 58% of its operational revenues this year. Last year it was 56% but this year it has gone up due to the increments given to its employees in salary. This resulted in a drop to its profit before tax margins. They reported 29% profits before taxes compare to 32% last year.

Year

2010

2011

2012

2013

2014

ROE

30%

28%

29%

27%

26%

If we look at their return on equity trend, they are slowly and steadily falling down. The culprit to this is because a big chunk of cash sitting on the balance Sheet is generating a lower returns on its investments compare to what their core business generates.

That cash belongs to its shareholders and if management cannot deploy that money to any high return on investments to what they are fetching now, then it should be returned back to its right owners.

The increment of 10% in its dividends policy is giving a signal to us that they want to do this slowly. But that also hint us about this business getting mature and is finding hard to grow any more from this point or will be growing very slow from here on. This decision to increment 10% extra dividend will impact negatively to its future fair values in the coming years.

We have calculated its actual value for this enterprise to be Rs 2,097 per share for the March end 2014. Our estimates for 2015 is in range of Rs 2,250 – Rs 2,600. We do still think that there is huge probability of price falling down compare to going up.

Again it doesn’t mean that price of Infosys will fall in the short term. But if you have bought that in range of Rs 3,200 – Rs 3,500 then surely you have bought them at premiums. And also if you are looking to accumulate if it falls further 5% – 10%, still then I think it is expensive.

Will be looking forward to what you think about Infosys and your rationale behind your investment.