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Infosys Technologies
Staying the course
We recently hosted Infosys management for an investor road show in Europe.
Strong discretionary demand, as evidenced by transformational and ERP deals,
supports our healthy revenue forecasts and is positive for realisations and
margins, in our view. Infosys remains our top pick in India's IT services space.
Positive demand signals going into 2011; management continues to plan for growth
We hosted Infosys management for an investor roadshow in Europe. The company is
confident of near-term demand, but circumspect about FY12, given weak economic and
employment data. Infosys is executing a record 30 transformational programmes (typically
US$20m-50m total contract value each) and has several greenfield and consolidation ERP
projects underway. In our view, these trends signify an improving discretionary demand
outlook. Its client budget survey results are expected in January, and initial data points range
from flat to a 3-5% increase. The company plans to make at least 20,000 campus offers in
order to build capacity for FY12 ahead of a demand recovery. Notwithstanding Europe’s
strong 2QFY11 performance (revenue up 15.6% in constant currency) on pent up demand,
management expects near-term revenue growth here to trail that of the US.
Beginning to implement price increases; realisation uptick likely in FY12
Management spoke of pricing discussions when negotiating renewals with clients, and is
getting increases in some instances. Discounts extended during the downturn are being
withdrawn. While the immediate impact is likely to be modest, management believes these
increases will feed into FY12 realisations. The company expects the growing share of nonlinear
services (now about 6% excluding Finacle) to be structurally positive for realisations.
Management is confident of its ability to manage margins
Infosys is confident it can keep margins in a narrow range in the medium term (assuming
normal salary hikes of 10-12% pa offshore, and 17-18% attrition) if demand remains strong.
Employee pyramid and realisation are the key margin levers, while utilisation is close to
optimal. Sharp rupee appreciation is a risk, but Infosys does not see it as highly probable.
We retain our positive outlook on the sector – Infosys is our top pick
Management’s comments and data points are in line with our investment thesis that Infosys
will pursue a realisation-led growth strategy that should give it room for margin management.
We reiterate our positive view on the sector and retain Infosys as our top pick.
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