An Indian IT Service Provider With Strong Fundamentals: Infosys Ltd ADR (INFY)

Key Indian rival Wipro Limited (NYSE:WIT), who competes in the IT services segment, posted mixed results for its last quarter, with weak results from its outsourcing division. The company is overall less optimistic about future earnings growth, although the outlook for the Indian IT sector still looks pretty good due to its persistent cost advantage over the developed markets.

Valuations and Metrics

Infosys currently trades at 17.34x earnings, cheaper than the industry average and certainly cheaper than Cognizant’s P/E of 23.11 and Wipro’s 19.22. The price to book and price to sales are both a bit high though at 4.44 and 4.18. The company has a high operating margin of 27% beating both Cognizant’s 19% and Wipro’s 17% soundly. The return on equity is also high at 27.50%. Moreover, the firm has an excellent balance sheet with 4.08 billion dollars in cash and zero debt. The company has a leveraged free cash flow of about $930 million which should provide enough cash for M&A activities as well as R&D.

Bottom Line

While India’s GDP appears to be struggling, the mighty Indian IT division still offers good prospects for growth. Operating with a labor cost advantage that’s hard to beat, the division’s dominant position worldwide is likely to remain in place. Infosys, one of the main companies that are active in this area, is doing very well in terms of earnings. With strong growth, an enviable balance sheet, and a valuation lower than that of competitors, the company seems like a good bet.

The article An Indian IT Service Provider With Strong Fundamentals originally appeared on Fool.com and is written by Daniel James.

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