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Buy
Infosys Technologies Ltd. (ADR) (INFY)
Return Potential: 20% Equity Research
Favorable risk-reward; raise ADR to Buy on local share upgrade
Source of opportunity
We upgrade Infosys Technologies ADR (INFY) to Buy from Neutral on the
back of the upgrade of its local share (INFY.BO) on Jan 14, 2010. We believe
that the recent price correction offers a favorable risk-reward and an
opportunity to enter the stock with a secular growth outlook. We reiterate
our view that INFY is poised for industry-leading revenue/earnings growth
(28%/30% in FY12E) on the back of a robust revenue outlook and easing
margin headwinds (for details, refer to our report Favorable risk-reward,
intact outlook offers opportunity; up to Buy, dated Jan 14, 2011). We
maintain our 12-m TP of US$85.0, implying 20% upside potential.
Catalyst
(1) We expect the Street to raise its estimates on INFY following the next set of
results. Our 28% revenue growth forecast for FY12E is based on INFY’s high
exposure to BFSI (35% of FY10 revenue), as regulatory reforms drive tech
spending in the vertical; (2) Campus hiring trends over next few months
should provide visibility into INFY’s growth expectations and ease margin
concerns, as large-scale campus hires are likely to normalize wage inflation
and attrition pressures. This should result in stable EBIT margins (30% by
FY13E); helped by headroom from operational levers like utilization; (3) A
strong US GDP recovery in 2011 (GS ECS forecasts 3.4%) could benefit INFY
more vs. its peers, in our view, due to its high exposure to the US (66% of
FY10 revenue); and (4) Potential currency depreciation vs. US$ could provide
upside potential to our revenue estimates and may cushion EBIT margins.
Valuation
We maintain our 12-month Director’s Cut-based TP of US$85.0, implying 20%
upside potential. INFY is now trading at 20.1X on FY12E P/E, at a 5% discount
to TCS (second time ever) and its own 7-yr historical average of 21X.
Key risks
INR appreciation, slower-than-expected economic recovery in US/EU.
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