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Infosys Technology Ltd.: Resuming Coverage with a Neutral Rating
Action
We are resuming coverage with a Neutral rating. We expect strong growth to continue in
offshore IT Services, and expect Infosys to participate. While we expect continued strong growth,
we are Neutral-rated at 23X C2011E EPS given the potential for industry growth deceleration,
limited margin expansion (INFY currently has industry-leading margins), and potential stock
underperformance if the overall stock market became increasingly volatile.
Summary
* Participation in strong secular shift to offshore IT Services. We expect the continued strong
growth in offshore IT, driven by overall market growth, shift to offshore, and some pricing
benefits. We believe Infosys will grow revenue at least in line with the overall market over the
next few years (likely 15-20%+).
* Industry-leading margins leave little room for improvement. Infosys has generated roughly
30% operating margins over the past couple years. While the progression has been admirable,
we believe there is limited room for improvement, and consider it possible that the company
passes on certain projects to preserve margins, potentially limiting growth relative to peers.
* Long-term pattern of execution. Over the past several years, the company has executed well
to plan. We expect this pattern to continue.
* Strong balance sheet. With about $6/share of cash and no debt, we believe this provides
flexibility for M&A, share repurchases, and dividends.
* We are valuation sensitive. While we acknowledge strong growth and execution, we would
prefer to buy around 20X C2011E EPS (currently 23X), given the potential for revenue growth
deceleration, limited margin expansion, and the potential for stock underperformance if the
markets weakened.
* Price target $75. Our price target reflects 22X C2012E EPS, a similar multiple as the average
over the past five years. We use 25X for Cognizant, which has grown more rapidly than Infosys
over the last several years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technology Ltd.: Resuming Coverage with a Neutral Rating
Action
We are resuming coverage with a Neutral rating. We expect strong growth to continue in
offshore IT Services, and expect Infosys to participate. While we expect continued strong growth,
we are Neutral-rated at 23X C2011E EPS given the potential for industry growth deceleration,
limited margin expansion (INFY currently has industry-leading margins), and potential stock
underperformance if the overall stock market became increasingly volatile.
Summary
* Participation in strong secular shift to offshore IT Services. We expect the continued strong
growth in offshore IT, driven by overall market growth, shift to offshore, and some pricing
benefits. We believe Infosys will grow revenue at least in line with the overall market over the
next few years (likely 15-20%+).
* Industry-leading margins leave little room for improvement. Infosys has generated roughly
30% operating margins over the past couple years. While the progression has been admirable,
we believe there is limited room for improvement, and consider it possible that the company
passes on certain projects to preserve margins, potentially limiting growth relative to peers.
* Long-term pattern of execution. Over the past several years, the company has executed well
to plan. We expect this pattern to continue.
* Strong balance sheet. With about $6/share of cash and no debt, we believe this provides
flexibility for M&A, share repurchases, and dividends.
* We are valuation sensitive. While we acknowledge strong growth and execution, we would
prefer to buy around 20X C2011E EPS (currently 23X), given the potential for revenue growth
deceleration, limited margin expansion, and the potential for stock underperformance if the
markets weakened.
* Price target $75. Our price target reflects 22X C2012E EPS, a similar multiple as the average
over the past five years. We use 25X for Cognizant, which has grown more rapidly than Infosys
over the last several years.
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