JM Financial: Infosys- buy target 3350

Going steady
􀂄 Demand remains strong, no red flags: Our interaction with Infosys
management before the quiet period indicates strong confidence in the nearterm
(FY11) demand environment. Even for FY12, slow economic recovery is
not a worry and it will not impact the growth trajectory; however, macro
shock is a risk. Clients are increasing offshore activities, deal signings
continue unabated and clients’ spending pattern show no red flags. Pricing is
stable with some instances of price increases, though not a trend. Retain BUY.
􀂄 Slow US economic growth is not a worry: Infosys management indicated
that slow growth in the US economy per se is not a concern and the company
should be able to maintain its growth trajectory. In such an environment,
clients focus more on cost optimisation and that plays to the strength of
Indian IT industry. However, a sudden macro economic shock, like the one
witnessed after Lehman bankruptcy in 2008, could result in few quarters of
slow growth before demand recovers.
􀂄 No cancellations/deferrals: There have been no cancellations or project
deferrals by Infosys clients and demand remains strong. However, clients are
focused more on short-term engagements and are not committing to longterm
engagements, pending CY11 IT budget finalisation. Compared to the
future outlook in Sept-Oct 2009, clients are more confident now and have
better visibility for next year (CY11/FY12).
􀂄 Pricing trend is steady: Infosys has been able to secure price increases from
clients in select cases; however, that is not a trend seen across clients. Clients
are also willing to accommodate the visa cost increase by a combination of
higher offshore and absorbing the cost themselves. Infosys is a) driving
service mix improvement to increase revenue productivity and b) utilisation
increase to fulfill demand in what is still a supply constrained environment.
􀂄 Retain BUY; Infosys is our top pick: We remain positive on tier-1 IT
companies on the back of significant market share gains against global
incumbents. While the stock may consolidate in the near-term post the recent
sharp move (10%+ in 2 weeks), we remain positive from a 6-9 month
perspective. Our Mar’11 price target of `3,350 is based on 21x FY12E EPS.