Infosys - changing mindset; visit note; Hold

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Infosys (INFO IN, INR 3,090, Hold)

n  Gearing towards changing business model…

We met V Balakrishnan, CFO of Infosys Technologies’ (Infosys).  We sensed a realisation within the company that it needs to proactively offer solutions to stay relevant to its clients. It is, therefore, now focused on creating/acquiring IPs and solutions. Also, it is building/strengthening capabilities to offer cloud computing solutions to clients. It has 2,500 people across various verticals working on creating IPs and solutions. While it is averse to compromising its philosophy of operating at higher pricing and margins, it is gearing towards the next growth phase; in the process, it is willing to let go resources that lack adaptability to the changed mindset. We believe Infosys is more inclined than ever to pursue acquisitions for owning more IPs/platforms to drive non-linearity in revenues.   

n  …will ensure soft landing

Infosys recognises the need to change and is talking tough to its employees. However, as it invests in building IPs or acquiring companies with IPs, platforms or solutions, it remains confident of ensuring a soft landing i.e. controlling the impact of all new initiatives on its existing business structure.

n  Confident of defending margins in medium term

Infosys, we believe, defends margins by controlling costs when revenue growth slows down and by increasing pricing when revenue growth improves. In the current phase of recovery, we believe, Infosys will find it tough to get substantial pricing increases (more than 5%) and, hence, there is a negative margin bias. However, the company remains confident of maintaining margins as it expects to utilise levers like pricing, utilisation and widening employee pyramid. Infosys expects to hike India salaries by 10-13% in FY12, lower than 15.5% in FY11.

n  Outlook and valuations: In Transformation mode; maintain ‘HOLD’

Infosys stock is down 10% YTD, same as the Sensex, but has underperformed both TCS and Wipro. We expect Infosys to face margin pressure, in line with our view that obtaining significant price hikes in the current environment will be challenging. Hence, at 21x FY12E earnings (same as TCS), we continue to prefer TCS for its superior revenue growth and better margin prospects. We maintain ‘HOLD/Sector Performer’ recommendation/rating on the stock.