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Infosys Technologies Neutral
INFY.BO, INFO IN
Still at the cross-roads though the incremental
direction is positive; we need to see more to be
convinced; stay Neutral
• Infosys is at the cross-roads but is incrementally promising. As Infosys restructures
to recapture growth momentum, it is faced with task of addressing certain imperatives
that we have highlighted in our prior research. Reassuringly, Infosys is now beginning to
address some of them. Till we see them substantially addressed, we perceive Infosys
more as a stock that is bought today on promise (more an FY13 story ala Wipro).
Valuations at <20x FY12E (P/E) are beginning to offer some support, in our view.
• Some issues are beginning to get attention. Primary among this include (a) targets for
“bread-and-butter offerings” with dedicated operations heads wedged in the respective
verticals (b) separation of leadership of verticals and horizontals (service-lines), (c)
dedicated organizational carve-out of important initiatives (hitherto, Infosys operated in
the manner of a mother ship tightly controlling its various smaller vessels); today, the
four consolidated verticals have more leeway in their go-to-market strategy, flexibility in
pricing and contract structuring – factors which have held Infosys back in the recent past.
• Several other issues still need to be sorted out (a) better hunting capability (sourcing
new clients and growing them) – Infosys is the industry-leader at mining but has to cover
much ground on hunting. New business (from new clients) typically accounts for only 3-
4% of revenues in a given year – this potentially grows four-fold to 12-15% in 3-4 years’
time. Likewise, new clients over a four-year period cumulatively contribute to as much
as 30-35% of revenues in year 5 underscoring the importance of good hunting (b)
aspiration to be seen as a value-player should not come at the cost of a weakened
positioning in “bread and butter” offerings- how Infosys manages the balance is key as
it seems to have lost the positioning in “bread-and-butter” business to TCS, and (c) too
much vertical concentration with single individuals handling multiple responsibilities - a
stretch in larger companies. Is there sufficient decentralization of P&L ownership like
there is at TCS? We think not.
• Increasingly an FY13 story resembling Wipro; we need to see more to be convinced;
stay Neutral. While vigorous moves to regain lost momentum are underway, how
Infosys manages the likely near-term pain is key. Management attrition in the wake of the
restructuring is inevitable - if prudently handled, this should not be of much concern. We
need to see more progress on the issues we have identified to be convinced that the
Infosys stock could return more than that of its peers TCS (OW)/Wipro (OW) over the
next 9-12 months.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies Neutral
INFY.BO, INFO IN
Still at the cross-roads though the incremental
direction is positive; we need to see more to be
convinced; stay Neutral
• Infosys is at the cross-roads but is incrementally promising. As Infosys restructures
to recapture growth momentum, it is faced with task of addressing certain imperatives
that we have highlighted in our prior research. Reassuringly, Infosys is now beginning to
address some of them. Till we see them substantially addressed, we perceive Infosys
more as a stock that is bought today on promise (more an FY13 story ala Wipro).
Valuations at <20x FY12E (P/E) are beginning to offer some support, in our view.
• Some issues are beginning to get attention. Primary among this include (a) targets for
“bread-and-butter offerings” with dedicated operations heads wedged in the respective
verticals (b) separation of leadership of verticals and horizontals (service-lines), (c)
dedicated organizational carve-out of important initiatives (hitherto, Infosys operated in
the manner of a mother ship tightly controlling its various smaller vessels); today, the
four consolidated verticals have more leeway in their go-to-market strategy, flexibility in
pricing and contract structuring – factors which have held Infosys back in the recent past.
• Several other issues still need to be sorted out (a) better hunting capability (sourcing
new clients and growing them) – Infosys is the industry-leader at mining but has to cover
much ground on hunting. New business (from new clients) typically accounts for only 3-
4% of revenues in a given year – this potentially grows four-fold to 12-15% in 3-4 years’
time. Likewise, new clients over a four-year period cumulatively contribute to as much
as 30-35% of revenues in year 5 underscoring the importance of good hunting (b)
aspiration to be seen as a value-player should not come at the cost of a weakened
positioning in “bread and butter” offerings- how Infosys manages the balance is key as
it seems to have lost the positioning in “bread-and-butter” business to TCS, and (c) too
much vertical concentration with single individuals handling multiple responsibilities - a
stretch in larger companies. Is there sufficient decentralization of P&L ownership like
there is at TCS? We think not.
• Increasingly an FY13 story resembling Wipro; we need to see more to be convinced;
stay Neutral. While vigorous moves to regain lost momentum are underway, how
Infosys manages the likely near-term pain is key. Management attrition in the wake of the
restructuring is inevitable - if prudently handled, this should not be of much concern. We
need to see more progress on the issues we have identified to be convinced that the
Infosys stock could return more than that of its peers TCS (OW)/Wipro (OW) over the
next 9-12 months.
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