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India Equity Research Reports, IPO and Stock News
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Of change and transition
ƒ Restructuring on track; was needed to achieve long-term goals
ƒ Transformational goal realistic, increased emphasis on IP sales
ƒ BUY, bear case is for stock to stay flat over next 12-months
ƒ But catalyst only in 2Q, hence prefer TCS, HCLT near term
Org. restructuring update
Our checks suggest the organisational
restructuring at Infosys is going as per
plan of completion in the next month.
Verticalising the previous matrix structure
requires finding new roles for all staff and
is a tedious process. That said, early
indications are that it is achieving its
intended purpose of improving decision
making by keeping it less centralised and
empowering the vertical heads.
A different Infosys in five years?
Longer term, restructuring should help it
execute its "Infosys 3.0" strategy of
cutting down headcount dependence and
achieving an equal revenue mix from transformation, operations and
innovation. Infosys’s strength in enterprise solutions and consulting (25%
of revenue vs 16-22% for peers) better positions it to win transformational
deals, in our view. The innovation goal (currently ~10% of revenue) is
more challenging, given a historical services mindset and the near-term
set back from the exit of Subash Dhar, the service line head. Yet,
increasing IP revenue is now an explicit target for each vertical and sales
person. Among Infosys's recently launched IP solutions, iEngage, Pay-toprocure and HRO are gaining traction, but the others are yet to pick up.
What will it take to raise guidance?
We believe the pipeline has improved since the disappointing 4QFY11
except in telecom, where pricing remains the source of differentiation.
Our estimates call for a 4.5% q-q USD revenue growth in 1QFY12
(guidance: 2.6-3.6%). The catalyst for the stock, in our view, is even a
marginal FY12 guidance raise. However, we do not expect that will come
through in 1Q as the existing guidance already calls for near 6% average
q-q revenue growth in 2Q-4QFY12. Moreover, some previously signed
large deals have not ramped up as per plan yet, and the company needs
to match its 30-35% historical success rate with the large deals it is
chasing. We believe investors will need to focus on a likely strong 2Q.
Bear case is for the stock to stay flat over 12-months
We rate Infosys BUY with a 12-month view. As we noted in Reality check
revisited (21 June), the bear case is for the stock to stay flat over the next
year. But in the near term, we prefer Tata Consultancy (TCS IN, BUY,
TP: INR1,370, CP: INR1,138) and HCL Technologies (HCLT IN, BUY,
TP: INR600, CP: INR493) which require less back-ended growth to meet
estimates. The risk can come from an unusual macro shock (like in 2008)
which could cause the stock to correct more than our DCF models can
justify. However, our economists do not foresee such a scenario.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Of change and transition
ƒ Restructuring on track; was needed to achieve long-term goals
ƒ Transformational goal realistic, increased emphasis on IP sales
ƒ BUY, bear case is for stock to stay flat over next 12-months
ƒ But catalyst only in 2Q, hence prefer TCS, HCLT near term
Org. restructuring update
Our checks suggest the organisational
restructuring at Infosys is going as per
plan of completion in the next month.
Verticalising the previous matrix structure
requires finding new roles for all staff and
is a tedious process. That said, early
indications are that it is achieving its
intended purpose of improving decision
making by keeping it less centralised and
empowering the vertical heads.
A different Infosys in five years?
Longer term, restructuring should help it
execute its "Infosys 3.0" strategy of
cutting down headcount dependence and
achieving an equal revenue mix from transformation, operations and
innovation. Infosys’s strength in enterprise solutions and consulting (25%
of revenue vs 16-22% for peers) better positions it to win transformational
deals, in our view. The innovation goal (currently ~10% of revenue) is
more challenging, given a historical services mindset and the near-term
set back from the exit of Subash Dhar, the service line head. Yet,
increasing IP revenue is now an explicit target for each vertical and sales
person. Among Infosys's recently launched IP solutions, iEngage, Pay-toprocure and HRO are gaining traction, but the others are yet to pick up.
What will it take to raise guidance?
We believe the pipeline has improved since the disappointing 4QFY11
except in telecom, where pricing remains the source of differentiation.
Our estimates call for a 4.5% q-q USD revenue growth in 1QFY12
(guidance: 2.6-3.6%). The catalyst for the stock, in our view, is even a
marginal FY12 guidance raise. However, we do not expect that will come
through in 1Q as the existing guidance already calls for near 6% average
q-q revenue growth in 2Q-4QFY12. Moreover, some previously signed
large deals have not ramped up as per plan yet, and the company needs
to match its 30-35% historical success rate with the large deals it is
chasing. We believe investors will need to focus on a likely strong 2Q.
Bear case is for the stock to stay flat over 12-months
We rate Infosys BUY with a 12-month view. As we noted in Reality check
revisited (21 June), the bear case is for the stock to stay flat over the next
year. But in the near term, we prefer Tata Consultancy (TCS IN, BUY,
TP: INR1,370, CP: INR1,138) and HCL Technologies (HCLT IN, BUY,
TP: INR600, CP: INR493) which require less back-ended growth to meet
estimates. The risk can come from an unusual macro shock (like in 2008)
which could cause the stock to correct more than our DCF models can
justify. However, our economists do not foresee such a scenario.
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process.
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