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Infosys Technologies
Revving up engine with brakes
on before lights go green
Quick Comment: Following the correction, we believe
Infosys stock is one of the best large-cap money-making
ideas in the industry for 2011.
We review a few key stock debates:
1) Is revenue growth guidance a concern? Infosys’
20% yoy US$ revenue guidance is in line with Street
expectations and we do not sense any skepticism /
concerns around it. We maintain our 27% US$ revenue
growth forecast due to 1) strong hiring in Q4 (8,930
additions instead of 5,800 as guided), 2) strong trends in
price realizations (+2% qoq in Q4) and 3) strong overall
demand environment (refer to our recent CIO survey).
2) Volumes have disappointed in Q3 and declined in
Q4 – will Infosys over-deliver in FY12e? We believe
the 2H deceleration is strategic and in preparation for a
strong FY12e. A muted 2H, backed by strong hiring, has
helped Infosys lower its utilization to 75%, which should
considerably ease the strain on hiring engine for FY12e.
We believe the relatively muted 2H is similar to a driver
revving up the engines with brakes on just before the
lights turn green.
3) Are margins finally collapsing after a decade?
Our learning over the last decade has been that in
well-managed IT service businesses, margins are
unlikely to collapse unless there is a “sudden, steep and
sustained” pricing decline. Infosys’ margins have not
declined by 300bps in the last five years and with price
increases expected in 2011, we believe margins are
unlikely to decline so steeply in FY12e either.
4) Where will the stock stabilize? In the event of
consensus following guidance, EPS estimate cuts for
FY12 could drag the stock to ~Rs2900. We are not
perturbed. We believe any consensus cuts/downgrades
would be followed by similar upward revisions around
the seasonally strong Q2 (Oct-11). Maintain OW with
21% upside and higher conviction now
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies
Revving up engine with brakes
on before lights go green
Quick Comment: Following the correction, we believe
Infosys stock is one of the best large-cap money-making
ideas in the industry for 2011.
We review a few key stock debates:
1) Is revenue growth guidance a concern? Infosys’
20% yoy US$ revenue guidance is in line with Street
expectations and we do not sense any skepticism /
concerns around it. We maintain our 27% US$ revenue
growth forecast due to 1) strong hiring in Q4 (8,930
additions instead of 5,800 as guided), 2) strong trends in
price realizations (+2% qoq in Q4) and 3) strong overall
demand environment (refer to our recent CIO survey).
2) Volumes have disappointed in Q3 and declined in
Q4 – will Infosys over-deliver in FY12e? We believe
the 2H deceleration is strategic and in preparation for a
strong FY12e. A muted 2H, backed by strong hiring, has
helped Infosys lower its utilization to 75%, which should
considerably ease the strain on hiring engine for FY12e.
We believe the relatively muted 2H is similar to a driver
revving up the engines with brakes on just before the
lights turn green.
3) Are margins finally collapsing after a decade?
Our learning over the last decade has been that in
well-managed IT service businesses, margins are
unlikely to collapse unless there is a “sudden, steep and
sustained” pricing decline. Infosys’ margins have not
declined by 300bps in the last five years and with price
increases expected in 2011, we believe margins are
unlikely to decline so steeply in FY12e either.
4) Where will the stock stabilize? In the event of
consensus following guidance, EPS estimate cuts for
FY12 could drag the stock to ~Rs2900. We are not
perturbed. We believe any consensus cuts/downgrades
would be followed by similar upward revisions around
the seasonally strong Q2 (Oct-11). Maintain OW with
21% upside and higher conviction now
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