Infosys Technologies -Good opportunity to accumulate the stock :: Morgan Stanley Research,

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Infosys Technologies
Good opportunity to
accumulate the stock
Quick Comment: Infosys management has yet again
under-promised and will over-deliver in the coming
quarters, in our view. FY12 US$ revenue guidance of
18-20% YoY is in line with street expectations and could
turn out to be conservative, in our view. EPS guidance of
Rs126-128( +5.5-7.3%) is below our and street
expectations, as management is working with an
assumption of a -300bps margin decline for FY12e.
Infosys’ margins have not declined by 300bps in the last
five years, and we believe margins are unlikely to
decline so steeply in FY12e either. Furthermore,
management does not appear overly concerned about
declining profitability but instead its commentary is
upbeat for FY12, in our view.
Management feels that if revenue growth surprises
positively, margins and EPS will have upside:
Infosys assumes an impact of -100bps each from rupee
appreciation and wage hikes, and has set aside -150bps
for onsite investment, whilst assuming only a +50bps
margin benefit from pricing. We believe that better price
realizations (+3% YoY at current levels), utilization and
productivity benefits in FY12 will help Infosys outperform
its conservative margin assumptions.
Why guide for such margin assumptions? We
believe Infosys management genuinely wants to make
investments in onsite hiring, especially in the US. So it
has taken the costs upfront, whilst keeping its revenue
outlook conservative – leading to the current FY12e
EPS guidance. We believe overestimating costs and
underestimating revenues is a prudent practice.
Maintain OW: Infosys has used 2HFY11 to prepare for
upcoming growth in FY12. It has lowered its utilization
from a peak of 83% to ~75% now and has maintained
margins at 29.4% despite a 4% rupee appreciation for
the year. As we move into FY12, volumes could surprise
positively over the coming quarters, in our view, and
pricing, productivity benefits will lead to upward EPS
guidance revisions, in our view.

Key results positives
1) Blended pricing improved by +2.5% QoQ. For the full year,
Infosys reported a blended pricing improvement of 2% YoY.
Management expects stable pricing in FY12e, which implies
+3% YoY in FY12e (+1% YoY on constant currency terms).
2) Infosys is exiting FY11 with a utilization rate of 75%, which is
significantly lower than the recent peak of 83%. We believe
Infosys has further room to improve its utilization rate to
manage margins in FY12e.
Key results negatives
1) Infosys reported revenues and operating margins below our
estimates. Volumes declined by 1.4% QoQ for the first time in
last seven quarters.
2) BFSI, the largest vertical, and the US, the largest geography,
declined by 0.3% QoQ and 0.5% QoQ in 4Q11, respectively.
3) Infosys’ cash flow from operations declined to US$256m
(-29% QoQ, -18% YoY) in 4Q11. For the full year, Infosys
achieved operating cash flow of US$1.3bn (-11% YoY) at
21.5% of revenues.
Other Highlights
1) Hedge position of US$620m; 2) cash and cash equivalents
of US$3385m; 3) declared a final dividend of Rs20/share;
4) Infosys expects to hire 45,000 people in FY12e and plans to
give wage hikes of 10-12% to offshore employees and 2-3% to
onsite employees; and 5) management expects the telecom
vertical to continue to lag other verticals.