Infosys reported its first quarter results for 2017 last Friday, the results look like this:

Infosys Q1: 2017 Q4: 2016 Q1: 2016 % Change: Q-Q % Change: Y-Y
Revenues 17,535 17,322 15,110 1.22% 16.05%
EBIT 4,798 4,991 4,203 -3.87% 14.16%
EBIT Margins 27.36% 28.81% 27.82% -1.45 Bpt -0.46 Bpt
Net Profits 3,436 3,597 3,028 -4.48% 13.47%

 

The margins have contracted on Q- Q as well as Y-Y basis. This is not a good sign to add any value to the business. Cost of employees, travel expenses and sub-contractor expenses had eaten up the margins.

Every extra rupee in revenue growth fetched compare to last year converted only Rs 0.25 in EBIT profits which is not impressive. The management had changed its revenue growth guidance in range of 11.5% – 13.50% and its EBIT margin will be in range of 27% – 28%. This will not boost its conversion rate.

On the analyst consensus forecast for the 2017 earnings, and as per our way of calculation of intrinsic value, we expect its spectrum will be in range of Rs 728 – Rs 867 for the 2017 financial year. After looking at the first quarter results, we expect its business value to remain at the lower band.

Infosys has almost Rs 35,000 crore rupees in cash which is equivalent to Rs 150 per share. I won’t mind adding this money on top of the above valuation band and expect its intrinsic value spectrum in range of Rs 878 – Rs 1,017 per share for 2017 and Rs 880 – Rs 1,137 per share for 2018 financial year.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.