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Infosys Limited
Analyst Meeting Takeaways:
Prepared for the Unknowns
Quick Comment: Infosys management appeared very
confident of weathering the current business cycle. We
believe Infosys has ample room to meet its revenue
guidance and deliver EPS above Rs140 (ahead of
consensus) as long as there are no major shocks due to
sovereign default and/or freezing up of the global
financial system. We believe Infosys has already
budgeted for the current turmoil in its fiscal year
guidance given in April-11 and has not seen global the
situation worsen more than it had earlier anticipated.
Does it matter to the stock? We suspect it does not
matter to the stock. In our view, markets are likely to
move toward pricing in the bear-case scenario for 2012
and then reward better-than-expected performance for
the outliers. Consequently, we would not rule out more
downside for the stock (Rs2,000-2,100 levels) in the
wake of global uncertainty and broad-based market
weakness in the near term. However, bottom for the
stock in 2011 would be significantly higher than the
levels seen in 2008, in our view. In times of downward
revision to global growth expectations, we believe
Infosys is one of the few stocks with the cushion to beat
consensus and hence should be one of the first stocks to
bounce back once markets settle.
Clients looking to increase off-shoring to manage
costs: Infosys has already seen clients asking for
increased off-shoring to manage their budgets
effectively. Infosys estimates that within financial
services, two-thirds of the budgets are for run-the-
business, and of the remainder, one-third is for risk and
compliance that is not cut even in the worst of times for
banks. Effectively 75-80% of the technology budget for
banks is not discretionary and can no longer be
compromised even in a recession. Decisions are
delayed primarily because clients are cautious and take
time to absorb and understand the changing business
reality. So far, projects have not been cancelled and
medium-term visibility is reflected in Infosys’
management’s confidence, in our view.
Key Highlights of the Analyst Meeting
Most of the investor concerns focused on the negatives that
could disrupt business planning for Infosys and its clients.
Infosys indicated that it has not seen any cut in budgets,
disruptions, project cancellations, or material delays in
decision-making by clients. There has been no dip in the deal
activity levels since the downgrade of US sovereign rating by
S&P. However, management remains cautious due to the
volatile environment and its possible impact on client spending
behavior.
Stable pricing environment: Infosys management indicated
that the pricing environment remains stable. Management
indicated that Infosys is able to achieve premium pricing
compared to its competitors in every single instance,
where it works in a multiple vendor environment.
Well placed for long-term industry-leading financial
performance: Management believes that the recent
reorganization and change in leadership should help Infosys
deliver industry-leading financial performance over the coming
years.
“Companies will have to continue investing in
technology over many (many) years to come.”
“Near-term is challenging but long-term outlook is
rosy.”
- Kris GopalaKrishnan, Infosys CEO
BFSI segment: Management indicated although it has not
seen any project cancellations so far, clients continue to be
relatively cautious in spending. However, some areas like risk,
compliance, and regulation are non-discretionary in nature and
it would be difficult for clients to cut any spending.
Energy & Utility, Communication and Services (ECS):
Management remains optimistic on growth in the Energy &
Utility segment. On telecom, management indicated that it
derives ~70% of its telecom revenues from the wire-line
segment and 30% from wireless. The wireless segment is
seeing good traction, and Infosys is winning large deals.
However, the outlook for wireline segment remains muted as
per the management.
Manufacturing: Manufacturing practice has over 100 clients,
which are in the list of Global 2000 companies. Drawing from its
2008 experiences, management indicated that there could be
short- to medium-term impact on some sub verticals like
automotives, industrials, and hi tech in the current challenging
environment.
Retail, CPG, Logistics and life sciences (RCL):
Management indicated it has ~66 Global 2000 clients from
addressable market of 354 Global 2000 clients in this segment.
Overall clients are cautious and their operating budgets are
under pressure. As per management, the key area of
investments are clients building multi-channel capabilities,
expanding to the emerging markets etc.
Other Highlights: 1) Infosys has 3,000-4,000 consultants who
are billed at the industry standard rates for consulting work. 2)
Infosys management believes that IT industry in India could
face a talent crunch over the next three to five years and hence
non-linear models are extremely important.
Ample room to manage margins: Management indicated
earlier that margins could decline by 250bp YoY in F2012. We
believe Infosys could absorb the impact of wage hikes in F2012
by managing variable pay. Currency would not affect margins,
if the rupee holds at current levels (vs. management
assumption of -100bp impact from currency). Management
believes the rupee could depreciate further to
Rs46-47/US$ in the current environment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Limited
Analyst Meeting Takeaways:
Prepared for the Unknowns
Quick Comment: Infosys management appeared very
confident of weathering the current business cycle. We
believe Infosys has ample room to meet its revenue
guidance and deliver EPS above Rs140 (ahead of
consensus) as long as there are no major shocks due to
sovereign default and/or freezing up of the global
financial system. We believe Infosys has already
budgeted for the current turmoil in its fiscal year
guidance given in April-11 and has not seen global the
situation worsen more than it had earlier anticipated.
Does it matter to the stock? We suspect it does not
matter to the stock. In our view, markets are likely to
move toward pricing in the bear-case scenario for 2012
and then reward better-than-expected performance for
the outliers. Consequently, we would not rule out more
downside for the stock (Rs2,000-2,100 levels) in the
wake of global uncertainty and broad-based market
weakness in the near term. However, bottom for the
stock in 2011 would be significantly higher than the
levels seen in 2008, in our view. In times of downward
revision to global growth expectations, we believe
Infosys is one of the few stocks with the cushion to beat
consensus and hence should be one of the first stocks to
bounce back once markets settle.
Clients looking to increase off-shoring to manage
costs: Infosys has already seen clients asking for
increased off-shoring to manage their budgets
effectively. Infosys estimates that within financial
services, two-thirds of the budgets are for run-the-
business, and of the remainder, one-third is for risk and
compliance that is not cut even in the worst of times for
banks. Effectively 75-80% of the technology budget for
banks is not discretionary and can no longer be
compromised even in a recession. Decisions are
delayed primarily because clients are cautious and take
time to absorb and understand the changing business
reality. So far, projects have not been cancelled and
medium-term visibility is reflected in Infosys’
management’s confidence, in our view.
Key Highlights of the Analyst Meeting
Most of the investor concerns focused on the negatives that
could disrupt business planning for Infosys and its clients.
Infosys indicated that it has not seen any cut in budgets,
disruptions, project cancellations, or material delays in
decision-making by clients. There has been no dip in the deal
activity levels since the downgrade of US sovereign rating by
S&P. However, management remains cautious due to the
volatile environment and its possible impact on client spending
behavior.
Stable pricing environment: Infosys management indicated
that the pricing environment remains stable. Management
indicated that Infosys is able to achieve premium pricing
compared to its competitors in every single instance,
where it works in a multiple vendor environment.
Well placed for long-term industry-leading financial
performance: Management believes that the recent
reorganization and change in leadership should help Infosys
deliver industry-leading financial performance over the coming
years.
“Companies will have to continue investing in
technology over many (many) years to come.”
“Near-term is challenging but long-term outlook is
rosy.”
- Kris GopalaKrishnan, Infosys CEO
BFSI segment: Management indicated although it has not
seen any project cancellations so far, clients continue to be
relatively cautious in spending. However, some areas like risk,
compliance, and regulation are non-discretionary in nature and
it would be difficult for clients to cut any spending.
Energy & Utility, Communication and Services (ECS):
Management remains optimistic on growth in the Energy &
Utility segment. On telecom, management indicated that it
derives ~70% of its telecom revenues from the wire-line
segment and 30% from wireless. The wireless segment is
seeing good traction, and Infosys is winning large deals.
However, the outlook for wireline segment remains muted as
per the management.
Manufacturing: Manufacturing practice has over 100 clients,
which are in the list of Global 2000 companies. Drawing from its
2008 experiences, management indicated that there could be
short- to medium-term impact on some sub verticals like
automotives, industrials, and hi tech in the current challenging
environment.
Retail, CPG, Logistics and life sciences (RCL):
Management indicated it has ~66 Global 2000 clients from
addressable market of 354 Global 2000 clients in this segment.
Overall clients are cautious and their operating budgets are
under pressure. As per management, the key area of
investments are clients building multi-channel capabilities,
expanding to the emerging markets etc.
Other Highlights: 1) Infosys has 3,000-4,000 consultants who
are billed at the industry standard rates for consulting work. 2)
Infosys management believes that IT industry in India could
face a talent crunch over the next three to five years and hence
non-linear models are extremely important.
Ample room to manage margins: Management indicated
earlier that margins could decline by 250bp YoY in F2012. We
believe Infosys could absorb the impact of wage hikes in F2012
by managing variable pay. Currency would not affect margins,
if the rupee holds at current levels (vs. management
assumption of -100bp impact from currency). Management
believes the rupee could depreciate further to
Rs46-47/US$ in the current environment.
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