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Infosys
Rs3,203.65 - BUY
A Clockwork Orange
Meeting with the Infosys COO, S D Shibulal reinforced our positive view
on Infosys for 2011. A timely IT budgeting cycle, pick-up in discretionary
spend and larger deal sizes is driving optimism on FY12 growth. That
said, Infosys is keenly watching the negative macro data points in
US/Europe for potential adverse impact on its order-book. Challenges on
the supply side are abating and attrition numbers should head down
through 2HFY11 driving fuller harvesting of the demand. BUY.
Lead indicators for FY12 remain positive
Timely IT budgeting at the client end and a likely 2-3%YY increase in IT
budgets in 2011 is giving Infosys greater confidence on sustainability of the
current robust demand trajectory. A push towards more long duration
discretionary projects is driving Infosys’ optimism on FY12 growth prospects.
Retail, lifesciences and resources verticals will likely be the key growth drivers
in the near term. Telecom remains challenged and per Infosys, regulatory
changes (net neutrality) need to precede any demand uptick here. Unlike
peers, Infosys is less upbeat on pricing trends and expects stable pricing at
best. Realisation increase through new engagement models/complex projects
is being balanced by pricing pressure on the traditional maintenance
business. We are building in a 25.4%YY $-revenue growth in FY12.
Manpower pressures easing; greater optimism on FY12 margins
After a material spike in 1HFY11, attrition has become more benign. Our
checks indicate fewer than 2,200 resignations in IT Services in the first two
months (Oct/Nov) of the Dec-10 quarter. High wage hikes and second round
of promotions (effective Oct-10) have clearly benefited on this front.
Importantly, Infosys believes that wage inflation pressures in FY12 will be
much lower than in FY11 aiding margin defence. However, Infosys remains
less sanguine on sub-contracting costs and indicated that continued shortage
of specific skill sets will keep these costs on the higher side. With plans for
25%+YY growth in FY12, utilisation has also likely peaked in the Sep-10
quarter (81.4%) and will likely go down in coming quarters.
BUY retained
Infosys trades at 25.9xFY11 EPS, but 20.3xFY12 EPS. The upside from hereon
is a matter of time, when confidence in the FY12 outlook takes root, and the
FY12 PE multiple can expand. We suspect this will happen over time, though
more gradually. On a 12-month view, we expect most of the pending HR/tax
challenges, which have held-back EPS growth in FY11 to resolve in Infosys’
favour, preparing a good set up for the next year. The factors that have been
headwinds to EPS expansion this year can become tailwinds sooner than later.
We are still counting on this shift, and retain a Buy rating on the stock.
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