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Infosys Technologies (INFO)
OW: Analyst Meet takeaways; uncertainty increases
Management remains cautious of the demand environment
No project cancellations so far, but decision making is
slowing down
Long-term focus on non-linearity reiterated; however,
progress remains lacklustre
Infosys hosted its Analyst Meet in Bangalore today. Many presentations were made
highlighting the emerging trends in the markets (updates on BFSI, Manufacturing, Retail,
E&U and Telecom among others), and Infosys's positioning and growth potential. Two key
takeaways: first, overall demand remains intact so far, but clients are increasingly cautious on
committing to long-term mega deals; so far no cancellations have occurred, according to the
management. Second, the company remains focused on growing its non-linear revenue
proportion and continues to invest in platforms and unit-based pricing initiatives.
Demand is currently stable, but uncertainty is high: Post the recent macro-downgrades,
the company has seen uncertainty among clients regarding future initiatives and they appear
cautious toward signing long-term mega deals. While no cancellations have happened, the
demand environment remains in flux. In the long-term Infosys attempts to move up the value
chain and grow its non-linear proportion of revenues. It reiterated its vision to have equal
proportion of revenues from the three streams: maintenance, platforms/solutions and package
implementation (including consulting). While the intentions are noble, we have not seen
material improvement in the proportion of revenues from platforms - it still remains close to
8.5% of total sales (which includes c4.5% from Finacle itself).
Summary of trends in Business Verticals
Retail Pricing in the maintenance services is under pressure, but the overall pricing and demand remains
stable. Decision making has slowed down modestly.
Telecom Likely to remain weak in 2Q as well; however wireless wins are increasing and expected to offset the
weakness in wire line. Deal wins have been good in 1H11.
Pharma Looking to increase outsourcing, vendor consolidation and shared services. The management expects
higher M&A activity in near future.
BFSI Clients getting conservative, but no cancellations or deferrals so far. Demand led by regulations,
compliance and maintenance work. Over 65% of the IT budgets are still Run-the-Bank budgets. Clients
committing short-term spending only.
Manufacturing The environment seems to be relatively muted in the manufacturing space.
Energy and Utilities Maintained optimistic view on new transformational deals. Has just signed a large deal with an oil field
company.
Source: Infosys Analyst Meet 2011, HSBC
Valuation
The stock is currently trading at 18x FY12e EPS and 15x on FY13e EPS. We value Infosys at 20x FY13e
EPS (in line with the historical average valuation) at a TP of INR3,300 and remain Overweight.
Under our research model, for stocks without a volatility indicator, the Neutral band is five percentagepoints above and below the hurdle rate for India stocks of 11%. This translates into a Neutral band of 6%
to 16% around the current share price. As our current target price implies a potential return of 34.8%, we
rate INFO Overweight.
Risks
Further deterioration in macroeconomic conditions is our primary risk. INR appreciation vs. USD (every
1% appreciation affects margins by 30-40bp) remains a concern.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFO)
OW: Analyst Meet takeaways; uncertainty increases
Management remains cautious of the demand environment
No project cancellations so far, but decision making is
slowing down
Long-term focus on non-linearity reiterated; however,
progress remains lacklustre
Infosys hosted its Analyst Meet in Bangalore today. Many presentations were made
highlighting the emerging trends in the markets (updates on BFSI, Manufacturing, Retail,
E&U and Telecom among others), and Infosys's positioning and growth potential. Two key
takeaways: first, overall demand remains intact so far, but clients are increasingly cautious on
committing to long-term mega deals; so far no cancellations have occurred, according to the
management. Second, the company remains focused on growing its non-linear revenue
proportion and continues to invest in platforms and unit-based pricing initiatives.
Demand is currently stable, but uncertainty is high: Post the recent macro-downgrades,
the company has seen uncertainty among clients regarding future initiatives and they appear
cautious toward signing long-term mega deals. While no cancellations have happened, the
demand environment remains in flux. In the long-term Infosys attempts to move up the value
chain and grow its non-linear proportion of revenues. It reiterated its vision to have equal
proportion of revenues from the three streams: maintenance, platforms/solutions and package
implementation (including consulting). While the intentions are noble, we have not seen
material improvement in the proportion of revenues from platforms - it still remains close to
8.5% of total sales (which includes c4.5% from Finacle itself).
Summary of trends in Business Verticals
Retail Pricing in the maintenance services is under pressure, but the overall pricing and demand remains
stable. Decision making has slowed down modestly.
Telecom Likely to remain weak in 2Q as well; however wireless wins are increasing and expected to offset the
weakness in wire line. Deal wins have been good in 1H11.
Pharma Looking to increase outsourcing, vendor consolidation and shared services. The management expects
higher M&A activity in near future.
BFSI Clients getting conservative, but no cancellations or deferrals so far. Demand led by regulations,
compliance and maintenance work. Over 65% of the IT budgets are still Run-the-Bank budgets. Clients
committing short-term spending only.
Manufacturing The environment seems to be relatively muted in the manufacturing space.
Energy and Utilities Maintained optimistic view on new transformational deals. Has just signed a large deal with an oil field
company.
Source: Infosys Analyst Meet 2011, HSBC
Valuation
The stock is currently trading at 18x FY12e EPS and 15x on FY13e EPS. We value Infosys at 20x FY13e
EPS (in line with the historical average valuation) at a TP of INR3,300 and remain Overweight.
Under our research model, for stocks without a volatility indicator, the Neutral band is five percentagepoints above and below the hurdle rate for India stocks of 11%. This translates into a Neutral band of 6%
to 16% around the current share price. As our current target price implies a potential return of 34.8%, we
rate INFO Overweight.
Risks
Further deterioration in macroeconomic conditions is our primary risk. INR appreciation vs. USD (every
1% appreciation affects margins by 30-40bp) remains a concern.
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