Goldman Sachs: Infosys (INFY.BO): Positive outlook; raise ests and target price

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Infosys (INFY.BO): Positive outlook; raise ests and target price
What’s changed
 We raise our 12-month target price for Infosys to Rs3,824 (from
Rs3,003). While we derive increased confidence from our IT services
trip that Infosys is poised for strong profitable growth on the back of
robust revenue outlook and sustained best in class margin profile,
we retain our Neutral rating on valuation.

 US exposure to benefit Infosys: We believe that Infosys will be a
major beneficiary of the improving US GDP outlook as it has the
highest US revenue exposure (66% of FY2010 revenues) among
large cap Indian IT companies. Infosys is also likely to benefit from
enterprise system upgrade cycle as a result of improved tech
spending environment and return of discretionary spending.
 Margins to be sustained: Infosys has seen utilization increase by
close to 900 bps over the last six quarters helping it mitigate the
headwinds of increased wage costs, adverse Fx fluctuation and
higher staff attrition and maintain its operating margins. Infosys’
EBIT margins at 29.7% in FY11E are the best in our coverage
universe and we expect these to be sustained as wage hikes and
attrition normalize going forward.
 Tax rates least impacted: Infosys is also likely to see least impact
in our coverage universe from cessation of tax benefits from FY2012
as its tax rate is already at the mandated level of 25%.
 Raise revenue and earnings estimates: We revise our revenue and
EPS estimates by 1.7%-14.1% and 2.1%-14.0%, respectively, over
FY11E-FY13E to reflect the improved growth and margin outlook.
Infosys’ revenue CAGR of 23% over FY10-FY13E is the joint-highest
in our Indian IT services coverage.
Valuation
 We raise our Director’s Cut based 12-month target price to Rs3,824
(from Rs3,003), implying 14% potential upside. Our TP implies a P/E
of 23.9X on FY2012E EPS of Rs160.03, a 4% premium to its large cap
peers. We believe that Infosys will continue to trade at a premium to
the sector as the industry leader.
 Infosys is currently trading in-line with the large cap average on one
year forward P/E and vs. its own historic average as well. We believe
that the valuation for Infosys adequately reflects the strong growth
momentum, and expect limited upside from current levels.
 We maintain our Neutral rating on INFY ADR (INFY) with the new
12-month Director’s Cut-based target price of US$85 (from US$65.3),
implying 12% potential upside.
Key risks
 Upside risks: INR depreciation; Downside: Lower-than-anticipated
GDP growth in developed markets, primarily US and INR
appreciation.