Infosys-Profitable divisions support business-growth momentum : Daiwa

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Infosys Technologies (INFO IN) Rating:1
Profitable divisions should support business-growth momentum



What has changed?
• Revenue from Infosys’s package-implementation and consulting division accounted
for 25.8% of the 2Q FY11 overall revenue (up 14.1% QoQ). This division might look
for a niche acquisition to improve its market presence over the medium term.
Impact
• As Infosys Technologies (Infosys) has been experiencing strong traction in this
division from its global clients, it plans to expand this division by increasing its
overall workforce by 30-35% from its existing 16,000 (for 2Q FY11) over the
next couple of quarters.




• Although the division might not be able to repeat its 2Q FY11 revenue growth
of 14.1% QoQ, we forecast the division’s revenue to expand by 7.3% QoQ and
7.5% QoQ for 3Q FY11 and 4Q FY11, respectively, compared with our overall
revenue-growth forecasts for the company of 5.6% QoQ for 3Q FY11 and 6.3%
QoQ for 4Q FY11.
• The company is strengthening its package-implementation and consulting
division for the following reasons: 1) the revenue-productivity per person is
roughly twice that of other divisions, and 2) the division leads a lot of onsite
projects that it then moves over to its offshore-development centres. Therefore,
we expect the division’s onsite revenue to drive the company’s overall revenue
in the near term, while its offshore revenue should enable it to defend its
EBITDA margin over the medium term.
• We forecast this segment to account for 25% of the company’s total revenue on
a steady-state basis, as this division is responsible for coming up with strategies
and rolling out projects. In addition, we forecast revenue from Infosys’s largest
segment (banking, financial services and insurance), which accounted for
35.4% of the overall 2Q FY11 revenue, to expand by 6.5% QoQ and 7.2%
QoQ, compared with our forecasts for the company’s overall revenue growth
(5.6% QoQ and 6.3% QoQ for 3Q FY11 and 4Q FY11, respectively).
• We forecast Infosys’s overall revenue for FY12 and FY13 to rise by 16.8%
YoY and 16.2% YoY, respectively. Similarly, we forecast Infosys’s overall
earnings to expand by 16.6% YoY for both years. The earnings-growth
potential for FY11 looks muted, in our view; we forecast tax rates to increase
from 21.3% for FY10 to 25.3% for FY11. However, we forecast the ROCE,
including cash & bank (which represents 64% of its capital employed) to be
healthy, at 33%, for FY11, and the ROIC to be 47.5% for the same period.
Valuation
• The stock is trading currently at PERs of 24.9x and 21.4x on our FY11 and
FY12 EPS forecasts. We maintain our target price of Rs3,400, at which the
stock would trade at a target PER of 24x on our FY12 EPS forecast.
Catalysts and action
• With Europe turning around, we do not see many risks to our earnings
assumptions, and as the company is putting more business-growth drivers in
place, we believe there could be upside potential for our earnings forecasts after
1Q FY12. We maintain our 1 (Buy) rating.