Infosys -- 2011 analyst meet takeaways ::Credit Suisse,

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●  Infosys held an analyst day in Bangalore, India, yesterday. The
company’s senior management and business heads outlined their
longer-term vision and presented an update on near-term trends.
●  Management continues to aim to deliver predictable, sustainable,
profitable and de-risked growth. It expects its investments in
‘Business Transformation’ and ‘Business Innovation’ to counter
both the commoditisation of its traditional offerings and
protectionism-related concerns in its key markets.
●  On the macro environment, it stated that there was no
deterioration in client sentiment post the S&P downgrade.
Therefore, it saw no reason to revisit its guidance at this stage.
●  The market sell-off has now resulted in Infosys trading at 14.1x
FY13 EPS. While that leaves the stock a lot more attractively
valued than at the time of our downgrade in April 2011, continued
macro uncertainty and restructuring-related challenges mean that
Infosys is unlikely to outperform in the near-term, in our view. We
maintain our NEUTRAL rating.
Infosys held its 2011 analyst meet yesterday. There were sessions on
each of the four main verticals—Financial Services and Insurance;
Energy, Utilities, Communication and Services; Manufacturing; and
Retail, CPG, Logistics and Life Sciences, as well as on the India
business, BPO and Finacle.
Long-term strategy continues to focus on PSPD growth
Management stated that its long-term goal continues to be to achieve
predictable, sustainable, profitable and de-risked growth.
Predictability. Management remarked that Infosys has always been a
highly data-oriented company with tightly controlled processes. This
allows it to have good business visibility over the near term.
Sustainability. The company continues to invest in the new engines
of growth such as cloud and mobility in response to client needs
despite near-term macro economic pressures so that it would be wellpositioned
to grow in the long term. Furthermore, business heads
across verticals reported that their current revenues are tiny
proportions of the respective addressable markets and hence, they
have significant headroom to grow.
Profitability. Management re-iterated its commitment to deliver
industry-leading margins. To mitigate the impact of the
commoditisation of its ‘Business Operations’ offerings; it is increasing
the proportion of revenues from outcome-based pricing projects. It
also stated that its investments in ‘Business Transformation’ and
‘Business Innovation’ offerings enabled it to differentiate itself from
competition and continue to enjoy a pricing premium.
De-risking. Management believes that its goal of diversifying its
offerings as well as markets would help it reduce risks to growth.
Further, it is actively building delivery capabilities in foreign locations
such as China to offset the risk of a talent crunch in India
Taking steps to combat protectionism
Management is concerned about protectionist legislation/higher visa
rejection rates in its key markets. In the near term, management
hopes to combat this by increasing onsite hiring, keeping more jobs
onsite and leveraging technology (e.g., video conferencing).
In the longer term, management stated that as proportion of revenues
from Business Transformation projects grew, it would be able to utilise
a larger number of onsite resources at high price points. This in turn
would make concerns relating to protectionism less relevant.
Macro environment concerning, but guidance unchanged
Management said that its clients continue to remain cautious due to
the uncertain macro economic environment. Hence, it has been
awarding only short-term/highly critical projects with quick payback
periods over the past several months.
However, it reported that there had not been a material change in
sentiment post the S&P downgrade of US sovereign rating. It
explained that its clients had not really loosened their purse strings
post the last crisis and so there was lower risk of budget cuts in this
slowdown as long as a ‘Lehman’-like event does not happen.
Since there had not been any budget cuts so far, management did not
see any need to revisit its FY12 revenue growth guidance of 18–20%
US$-revenue growth.
Cheap, but unlikely to outperform in the near term
The market sell-off has now resulted in Infosys trading at 14.1x FY13
EPS. While the stock appears significantly cheaper than at the time of
our downgrade in April 2011, continued macro uncertainty and
restructuring-related challenges mean that Infosys is unlikely to
outperform in the near term, in our view. Therefore, we maintain our
NEUTRAL rating on the stock.