Infosys Q3 2015 Results

Infosys (INFY) is one of the largest software services company in the world based out of India. The company is a bellwether of the Indian software sector and recently came out with a good set of quarterly results. The stock increased by 6% in the Indian markets, as the company surprised the market with Operating margin increasing by almost 60 bps. Infosys has been transforming itself under their new CEO Vishal Sikka. Infosys had fallen behind its other Indian software peers in the last couple of years. This necessitated the return of Infosys founder Mr. Murthy. A lot of the top management was fired/left and finally Mr. Sikka (from SAP) was appointed. The company is making all the right moves under the new CEO. It is focusing on innovation and on retaining employees (gifting of 3000 new iPhones to top performers). Infosys seems a good stock to invest under Mr. Sikka.

Q3 2015 performance

Infosys reported a good set of results for Q3 FY 2015. There was an increase in the margins and revenue growth. It also did well on the employee front by reducing the attrition level and increased its focus on innovation.

1) Revenues – Revenue increased to $2.218 billion from $2.1 billion a year ago. Volume growth was 4.2%, which was the highest quarterly growth in the last 3 years. Dollar revenue growth was 2.6% in Q3 in constant currency and 0.8% in reported currency.

2) Sharp rise in Margins – Gross margin for the quarter stood at 38.7%, which increased by 20 basis points. Operating margins for the quarter achieved a 10-quarter high at 26.7%. Operating margin increased by 63 bps as compared to the last quarter. Net margin for the quarter was 23.5%.

3) Beats Earnings – The company reported net income of $522 million versus $463 million in the last year. The company reported EPS at $0.46 for the quarter. It beat analyst estimate of 43 cents per share.

4) Robust Project Pipeline – Infosys has a pipeline 56 projects in open Infosys’ Information Platform (IIP), which is fast gaining traction and around 12 projects based on artificial intelligence technologies. In Finacle, the company won 18 projects and 20 go-lives across the different regions of EMEA, America and APAC. The momentum is getting better particularly in the Western markets. Finacle is a core banking platform, capable of processing over 21,000 payments per second.

5) Focus on retaining Employees – The company is providing more flexible work-from-home and maternity leave policies and easier transfer policies across centers. For Q3, the company announced a 100% variable bonus pay out. The attrition rate declined in Q3 2015. Employee utilization increased to 83.7% which was the highest in 11 years. Infosys has a high attrition rate as compared to other software service companies. The company is now focusing on reducing the attrition rate and retaining top performers.

6) Future Outlook – The company surprised the market by retaining its full year dollar revenue guidance for FY15 (ending March 2015) of 7-9% y/y growth. The management anticipates Q4 operating margins to be in the 24-26% range.

Challenges

a) Slowing Global Economy – While the USA economy continues to grow strongly, other regions such as Europe are facing economic headwinds. World Bank recently lowered the global economic growth forecast to 3% for 2015. Infosys generates most of its revenues from exports and a slowing world economy is a concern for the company. Many finance companies in the US are cutting down their budget of IT spend, partly because of the fairly significant fines that have been levied.

b) Currency headwinds – The sharp depreciation of the major currencies is also impacting Infosys revenues. The company’s sequential revenue growth in Q3 was adversely impacted to the extent of 1.8% due to USD appreciation against other major currencies.

Stock Performance

INFY performed well in the last one year and gave better returns of 13.82% than the broader S&P market (9.8%). INFY also outperformed its Indian peers like IBM (IBM) and Wipro (WIT) which were down -16.23% and -10.3%. Its stock performance was even better in Rupee terms, given that the Indian currency has depreciated against the USD.

Source: Google Finance

Stock Valuation

The stock is currently trading at $33.86 and has a market capitalisation of $ 38.7 billion. The company’s P/B is 4.7x, which is lower than industry average of 5.4x. IBM has a P/B of 10.9x. The stock is trading at a forward P/E of 18.3x, which is lower that other large competitors such as TCS which is trading above 20x. Given that the company has become more aggressive on capturing marketshare and increasing growth, there is some headroom for the valuation multiple to increase.

Summary

The company witnessed growth in finance, insurance sectors but observed headwinds in retail & CPG, telecom, energy, life science sectors. Clients are focusing more on new technologies and portfolio simplification, cloud apps, marketing operations, building online presence etc. Infosys like other software service companies like TCS are shifting their priorities to the SMAC (Social Media, Mobile, Analytics and Cloud). Technology is becoming more important to company operations around the world with the advent of Internet 2.0 technologies. Infosys is focusing its energies on capturing this new wave of growth, as companies adopt these new technologies. Investors are becoming more positive towards Infosys, as the company is making the right moves and meeting expectations on growth.

Procter & Gamble

Procter & Gamble (PG) is amongst the leading consumer goods companies globally. It came into existence in 1837. The company has presence in more than 180 countries today, serving around 5 billion people across the globe. The company is a leading house hold brand name owning more than 180 brands currently. Though Procter & Gamble products have a 60% share of US laundry market sales, they earn approximately 85% of the profit and cash generated in the category. Likewise, the company has a 70% share of blades and razors sales globally but a 90% share of the profit. Procter & Gamble has shown a strong growth trend in the past few years and has a history of increasing dividend payments to stockholders. I would recommend a buy for the stock, given its strong brand name, robust distribution network globally and its leadership position in the consumer goods segment.

Why P&G deserves to be in your portfolio

i) King of the Consumer Segment – P&G as a company, understands the needs of the common people and succeeds in converting them into potential consumer products. Today the company is a common name in each household across different countries. The company is an industry leader in terms of innovation. Procter & Gamble was the forerunner for the 2013 New Product Pacesetters list, since it launched 7 of the top 10 most successful non-food products of the year.

ii) Dividends – Procter & Gamble has a history of 58 years of consecutive dividend increases. The reason being that the company was able to grow its free cash flow by an annualized 10.3% every year since the last twenty years. That means that the investors were able to bag almost 800% in dividend pay outs, even though the total return from the company amounted to 500% for the same time frame. The current dividend yield is 2.8%.

iii) Multiple Billion Dollar Brands -The company owns 23 brands with annual sales of $1 billion to more than $10 billion, and 14 with sales of $500 million to $1 billion. P&G’s brands can be segmented into four broad categories:

  1. Beauty, Hair and Personal care – There are more than 30 brands under this segment. Leading ones like Pantene, Head & Shoulders, Wella, Olay, Hugo Boss, D&G etc.
  2. Baby, Feminine and Family care – 7 Brands for personal hygiene for the whole family
  3. Fabric and Home care – Leading brands like Tide, Ariel etc.
  4. Health & Grooming – Leading brands like Gillette, Oral B, Braun etc. Gillette has an 88% share of this segment.

iv) Focusing on core segments – Procter & Gamble is currently focusing on shedding off its stagnant brands and thus strengthening its portfolio of stronger revenue generating brands. The management is thus streamlining its business and wants to get rid of its 90 to 100 slow growing product lines. P&G has divested 28 brands to date. Most recent one being its exchange of Duracell business for Berkshire Hathaway’s P&G stock. The company now plans to sell its $ 7 billion Wella hair care brand too and is looking for a potential buyer. P&G recently sold two of its pet care brands – Iams and Eukanuba in Taiwan, Singapore, Malaysia and Brunei to Mars, Inc. P&G wants to be more focused on its other 80 strong brands like Tide and Pampers, which are the top revenue generating brands for the company. They generate nearly 90% of current P&G sales and more than 95% of current profit.

v) Market Expansion – Procter & Gamble is present globally. Almost 39% of its total sales were in North America, followed by 28% in Europe and 16% in Asia. Remaining 17% sales were in Latin America, India, Middle East and Africa. Approximately 39% of the net sales is from developing markets. There has been a rise in consumerism in the developing economies because of the steadily rising incomes and population in these markets. The company has innovation facilities in US, England, Switzerland, and Brussels. It recently announced innovation hubs in Beijing and Singapore.

vi) Annual Performance – The company scores strongly on all major financial parameters. It has a good cash flow, positive and expanding profit margins and decent debt levels. P&G recently gave its 2014 annual results. As can be seen from the picture below, there has been an increase in net sales, cash flow and EPS. The current debt-equity ratio is 0.50, which is below the industry average.

We met our business and financial objectives for fiscal year 2014. Organic sales grew 3%, in line with the market. Core earnings per share increased 5%. We generated $10.1 billion of free cash flow, with 86% free cash flow productivity. We increased the dividend 7% – the 58th consecutive year that P&G’s dividend has been increased – and we returned $12.9 billion in cash to shareowners through $6.9 billion in dividends and $6 billion in share repurchase – A.G. Lafley (Chairman of the Board, President and Chief Executive Officer).

Source: P&G

Risks

a) Competition – The company faces tough competition from other multinational consumer goods giants such as Unilever and Nestle. Even on a segment level, P&G faces competition. For example, its beauty segment faces competition from Estee Lauder Co., Loreal; home care from Colgate-Palmolive, Henkel, and Reckitt Benckiser etc. All these brands are also quite popular globally.

(click to enlarge)

Source: Statistica

b) Loss making Brands – Procter & Gamble owns several brands under its umbrella. Most of them are leading names in the industry, though some of them are slow growing and have become stagnant with time. The company is planning to shed off such brands to concentrate more on the strong revenue generating ones. This could be a limiting factor for the company as it will need to spend time or even cash (as in the latest Duracell deal) to find the buyers for such segments.

c) Cost Fluctuations – The company is directly affected by any changes in commodity prices, raw materials, labor costs, energy costs, pension and healthcare costs. Other factors to consider are foreign exchange and interest rates. P&G therefore needs to play the market forces well, in order to mitigate any effects of changes in the above parameters.

Stock Valuation

The P&G stock is currently trading at ~$90, which is very close to its 52 high price of $ 91.17. The company has a market capitalization of $ 245.2 billion with a P/B of 3.8x and P/S of 3.2x. In contrast the UL stock has a P/B of 7.5x and P/S of 2.1x, having a market cap of $ 127.8 billion. P&G (~7.37%) gave better returns than Unilever (~4.04%) in the last one year. The stock price has steadily risen in the last few years, moving in an upward trend since the mid of 2012 and reaching the peak high currently. The stock gave 44.17% returns in the last five years.

P&G 5 years stock price

Source: Google Finance

Conclusion

The annual average returns to shareholders of US listed consumer goods companies increased by 10% over the last 25 years. It outperformed not only the broader S&P 500 index but also IT, energy and telecom industries, which were fast growing during that time. One of the reasons for the fast growth in this segment is the emergence of consumerism especially in the emerging markets. P&G alone gave an astounding ~3464% returns since in 1978, when S&P returned ~2197%. P&G is a rock solid stock and can even form an integral part of one’s retirement plans too. With the company’s rich dividend pay outs, strong cash balance, management’s focus on streamlining the business and the consumer trust on its brands, it definitely deserves to be a part of your portfolio. However given the peak high prices it is now trading, I would advise investors to wait for a suitable entry point.

Solar installation business has gained massive popularity in the last couple of years. Previously the solar companies used to just manufacture solar cells, wafers, modules or other components, but today no solar company is complete without a solar installation arm. With solar energy reaching grid parity across various parts of the globe, the cost of solar energy is getting affordable with each passing day. People have realized the significance of going solar – it is cheap and green. Hence more and more communities, industries on a commercial, industrial or residential scale are shifting to solar energy for their energy needs.

Here is the list of Solar Installers in India:

1) SunEdison – SunEdison is a MEMC company. It was bought by MEMC in 2009. MEMC manufactures and sells wafers and related products to the semiconductor and solar industries, while SunEdison was amongst the biggest system installers in the US then. MEMC since then is strongly expanding the system installation business not only in the US, but other parts of the world like India, Europe, Korea, Canada and other places. SUNE though a subsidiary of MEMC operates under its own name. SunEdison India deals with both ground mounted and rooftop solar installations. The company has experience of building the world’s largest utility scale solar power plant (72 MW solar plant in Rovigo, Italy).

2) TATA Power Solar – is a wholly owned subsidiary of TATA group of companies. The company was ranked no. 1 as a third-party EPC player in India Solar Map 2014. TATA Power has rich experience in solarizing the rooftops and has done it for big business firms, power producers and the Government of India too. TATA Power Solar is a manufacturer of many solar products including solar lights, water pumps, heaters and power packs. IIT Roorkee went solar with TATA Power Solar in India. The company deals with both rooftop and ground mounted installations. The company has also solarized the grids, from where energy is being not only for captive consumption by big industries and power producers, but also sold for community consumption.

3) Waaree Solar – Came into existence in 2007 in India. The company has experience in EPC utility grid projects and rooftop solutions. Investing in Waaree Rooftop solutions also provides various tax benefits for a commercial establishment. The company has a 250 MW solar panel manufacturing unit in Surat, India. The Waaree group is present in more than 68 countries and 26 sales offices in India. The company has 8 offices globally in UAE, Europe, USA and Australia. The company has an experience with solar thermal and EPC utility grid projects. Waaree manufactures a wide range of solar products ranging from solar modules, to solar water pumps and rooftop solutions.

4) Vikram Solar – Vikram Solar is a manufacturer of PV solar modules. The company has its headquarters in Kolkata, India. It is a part of the Vikram Group of companies, having an experience of 40 years in engineering and manufacturing activities. The manufacturing plant has a 150 MW installed capacity spread across 40,000 sq ft area in Falta, West Bengal. Vikram Solar has offices across the whole of India and global offices in Europe and Africa. The company has delivered various ground mounted and rooftop solar projects (utility, commercial and residential) across the whole of India.

5) RelyOn Solar – Founded in 2010 the company has a 10 MW solar power plant at Osmanabad Maharashtra. RelyOn Solar has been accredited as a channel partner by the Ministry for Off-Grid and Decentralized Solar Applications under JNNSM. The company has done more than 500 solar power installations till date be it in hospitals, government buildings, telecom towers, petrol pumps or banks. The company has experience in utility, commercial and residential installations. Other than installation and EPC business, the company also provides centralized solar street lightning system, solar rooftops for homes, off-grid solar power plant and solar powered water pumps.

6) Azure Power – The company came into existence in 2007 and has been amongst the leading solar companies in the Indian industry. Azure Power has experience with grid connected, rooftops and off-grid systems in the country. The company has done such installations in villages, remote areas and residential complexes in India. The company has the longest operating history in India in terms of power plants.

7) Solon – Solon India is apart of the Solon Group. The company has its office in Secunderabad in Andhra Pradesh India. The company has installed more than 300MW of solar systems worldwide. It provides single-axis tracking solutions, fixed-tilt ground mount solutions, rooftop solutions and shade structure solutions.

8) Solairedirect – Solairedirect Energy India Pvt. Ltd. is a subsidiary of the Solairediect Group headquartered in Paris. The company has presence across all the PV value chain of solar. It is engaged in modules production, integration, project development, financing, installation, operation and sales.

You can also read List of Solar Installers in USA.

 

The Bullish Indian Economy

The Indian economy which was in dire straits just a year ago is seeing lots of good news these days. Most investors had given up on the Indian economy and markets as corruption and policy paralysis had become endemic in the last 5 years of Congress party rule. High inflation, commodity prices and billion dollar scams had made retail investors run for the hills. People did not have enough disposable income to spend and jobs had become scarce. Massive scams in telecom, real estate, construction and aviation industry had led to hundreds of thousands of job losses. High interest rates and a predatory government had made Indian industry leaders look to foreign shores when considering investments. Power, capital, labor etc. all had become either too expensive or too inefficient.

However, the new government led by the BJP has done a dramatic turnaround. Despite skeptics, the new PM of India has shown an immense amount of energy and have made many small and big policy changes in just 5 months. The majority of his party has also helped in pushing reforms in defense and insurance. He has also encouraged structural reforms in sanitation and labor. Though critics still say that there have been no actual changes on the ground, even his worst critic will not be able to downplay his commitment and hard work. Sentiment has improved massively and investment/growth should be just around the corner in my view.

Factors leading towards a Bullish India

The Indian economy is also getting big tailwinds from the following factors:

a) The sharp fall in crude oil prices which contributes to more than 50% of India’s large fiscal deficit.

b) Fall in other commodity prices such as coal, iron etc which will also help India, which is a big commodity importer.

c) The new central bank governor Rajan has proved to be immensely effective in his hardline stance towards inflation. The inflation has already fallen to a 5 year low which will strongly help consumers.

d) Interest rates should go down very soon in India, given the inflation is moving down rapidly after 5-6 years of very high inflation. This will boost the infrastructure firms which were down in the dumps for a very long time.

The Indian government’s “Make in India” campaign and strong push for investment from countries like China, Japan and USA is going to see a strong jump in manufacturing in the coming years. Companies are showing a big interest given India’s massive 1.2 billion population. India is a large untapped market which companies would love to tap given the anemic growth being seen in Europe, Japan and now China. India’s low per capital income implies that given the right policies and environment it can grow at very high rates for a very long time. The Indian democracy also ensures that you can get reasonable profits from your investments unlike other countries.

India is a great market to invest in, given the current circumstances. For once I agree with the majority that India is at the cusp of a multi-year bull market.

Solar Powered Charging Station

Just one week before the Earth Day (22nd April), Kyocera installs a 230 kW solar charging station in Japan to charge electric vehicles. Imagine the amount of fuel that will be saved and also the amount of pollution that can be checked by using electric/ solar powered vehicles. We at Greenworldinvestor have always promoted solar energy and its applications. Its high time that people and companies take up the responsibility of saving the environment and screening planet Earth from the ill effects of Global Warming.

There is a dearth of electric cars on the globe. Moreover the solar powered charging stations are also few. It is a problem of the chicken and egg, which one of them came first. Users blame that there are not sufficient electric charging stations and manufacturers feel there are not sufficient electric cars. And so the problem goes hand in hand. However, Kyocera took a step forward in this direction and installed a 230 kW solar powered electric station at the HQ office of Shintec Hozumi, a Japanese automotive parts manufacturer. This solar charging station comes with an EV battery backup. The solar panels used on the rooftop get charged by solar energy and then in turn is used to charge the electric cars.

It looks something like the image below:

Solar Charging Station Kyocera

About Kyocera

Kyocera is one of the oldest solar panel manufacturers and is second only to Sharp amongst the Japanese companies. It  also manufactures industrial ceramics, telecommunications equipment, office document imaging equipment, electronic components, semiconductor packages, cutting tools, and components for medical and dental implant systems. Kyocera Solar Corp. in Japan was founded in 1996 and Kyocera Solar Inc. in the U.S. in 1999. The company has production bases in Japan, Mexico, Europe and China.

PV Tech

The rooftop plant at Shintec Hozumi HQ in Aichi Prefecture, Japan, where PV panels on the buildings’ rooftops top up EV batteries through charging stations. In the event of disaster, the EV batteries can then be used as back up energy for the building. The rooftop PV system, also manufactured by Kyocera, has a generation capacity of 230kW.

Prepaid Solar

One of the biggest problems in the growth of solar energy is the capital cost which accounts for almost 90% of the total lifetime cost of solar energy. Even small scale solar energy systems which can power a couple of lights with energy storage are out of the reach of poor customers in places like India and Africa. These people cannot afford the $200-$500 for such systems, though they spend a greater amount on alternative forms of energy such as kerosene.

Converting these customers towards solar energy makes a huge amount of sense both from a commercial and an environmental point of view. It’s a win-win for the customer, the financing agency as well as the government. There are a lot of social enterprises that are providing financing and products to the bottom of the pyramid customers in India and Africa. We have already featured D.Light as one of the first firms to provide quality products by partnering with SHGs. Now telecom providers in Kenya and Uganda are also starting to provide such services.

Read more about Efficient Solar Products here.

Note prepaid telecom services have been a huge hit in these countries and have allowed telecom penetration to jump exponentially even amongst the poorest customers who make $2 a day. Now the same telecom companies are using their expertise and distribution networks to target their own customers using the prepaid solar schemes. Many areas in the Third World do not have access to the power grid and use primitive fuels for energy. Solar energy is a boon for these people as it does not require a grid. The solar systems are sold for a small payment, while the rest of the cost is amortized over a longer duration. This benefits the customers, as he/she does not have to use expensive kerosene and helps the environment as well. While companies such as Solarcity (SCTY) and Sunrun are doing this for middle class and upper class customers in the USA, these companies are making a huge difference to the poorest of the poor.