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Infosys Technologies (INFO)
Technology
Investing for the next phase of growth. At its annual analyst meeting, Infosys
reemphasized its commitment to investing in platforms, IPs and business transformation
services even if it involves near-term sacrifice. The company is confident of achieving
FY2012E guidance and has not witnessed recent uncertainty in global markets
impacting client decision-making. At 14X FY2013E earnings the stock valuations are
attractive in our view. BUY reiterated.
Making the right bets but can backfire in case of a material slowdown
Infosys reiterated it focus on ensuring a balance of revenues between business operations (60% of
revenues), transformation (30% of revenues) and innovation. Infosys has accelerated investments
in business transformation and already recruited 1,500+ consultants in US and Europe. Infosys
believes this would increase addressable opportunity, stickiness of revenues and revenue
productivity (which would enable it to protect profitability). These investments can be easily
funded and absorbed in the P&L during a phase of high growth. However, Infosys can end up with
a high cost structure and hurt margins in case of a material slowdown (which inevitably leads to
reduced discretionary spending) in the interim, in our view.
Confident of FY2012E guidance but do not expect material outperformance of 2Q guidance
Infosys has guided for back-ended revenue growth, which is a source of concern for the Street.
However, the management indicated that even as clients are cautious they have not seen any
cancellation of projects or desire of clients not to spend IT budgets. In addition, the company also
indicated that they have not seen job losses among its clients set. Outperformance and
achievement of back-ended revenue growth guidance is contingent to some extent on decisions
on large engagements which may be taken in August/ September 2011. However, we would
caution investors and would not be surprised if revenue guidance beat is minimal in 2QFY12E.
Stock correction presents a good buying opportunity
After recent correction, Infosys trades at 18X FY2012E management guided EPS and 17X on
consensus numbers. We find the valuations attractive and believe that the markets are already
building in possibility of guidance miss in FY2012E and weak FY2013E performance. Assuming
that the stock trades at mid-cycle multiple (essentially implying modest market share gain for 3-4
years followed by no market share gain scenario to perpetuity), stock price builds in an EPS in the
Rs130-145 range in FY2013E, easily achievable in our view even in a distressed scenario. We will
review our estimates and target price shortly. Our current target price of Rs3,400 is based on
peak-cycle multiple of 20-22X. Exhibit 1 details pricing/ volume downside scenarios on Infosys.
No upside from pricing near term
Infosys reiterated multiple times that the core ADM services are getting commoditized at a
brisk pace. Infosys has effectively recognized the imperative to invest in next generation of
services viz. business transformation and innovation. We would not be surprised if pricing
remains under pressure for core services but this can be mitigated through change in service
mix and outcome-based pricing models.
Reasonable momentum in financial services vertical
Infosys has a strong financial services practice and works with most of the large
organizations globally. Infosys has comprehensive integrated service offerings across all the
micro verticals and tools/ solutions to accelerate/ speed delivery and time-to-market. Infosys
has witnessed a steady stream of projects and can sustain business momentum in FSI in the
near term.
Telecom vertical will continue to be a drag for the next two quarters
Infosys’ telecom practice has been a drag with revenues concentrated in wireline segment
and developed markets. Infosys expects gradual correction in this skew of revenues. This
would be partly achieved through mining of rich client base and partly through leverage of
solutions and business transformation capabilities. Infosys works with 8 of top-9 cable
companies in US, 6 of top 10 wireline players globally and 5 of top-10 wireless companies.
Infosys recently won two large transformational deals in the wireless space.
However these wins may not be enough to offset impact of ramp-down from select wireline
customers in the near term. For example, BT has started a process of re-tendering major
portions of its IT outsourcing portfolio. Business being done by all vendors (TM, Infosys and
TCS are among the larger vendors for BT in India) is likely to be up for re-bid.
We expect telecom business to underperform corporate average growth in FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFO)
Technology
Investing for the next phase of growth. At its annual analyst meeting, Infosys
reemphasized its commitment to investing in platforms, IPs and business transformation
services even if it involves near-term sacrifice. The company is confident of achieving
FY2012E guidance and has not witnessed recent uncertainty in global markets
impacting client decision-making. At 14X FY2013E earnings the stock valuations are
attractive in our view. BUY reiterated.
Making the right bets but can backfire in case of a material slowdown
Infosys reiterated it focus on ensuring a balance of revenues between business operations (60% of
revenues), transformation (30% of revenues) and innovation. Infosys has accelerated investments
in business transformation and already recruited 1,500+ consultants in US and Europe. Infosys
believes this would increase addressable opportunity, stickiness of revenues and revenue
productivity (which would enable it to protect profitability). These investments can be easily
funded and absorbed in the P&L during a phase of high growth. However, Infosys can end up with
a high cost structure and hurt margins in case of a material slowdown (which inevitably leads to
reduced discretionary spending) in the interim, in our view.
Confident of FY2012E guidance but do not expect material outperformance of 2Q guidance
Infosys has guided for back-ended revenue growth, which is a source of concern for the Street.
However, the management indicated that even as clients are cautious they have not seen any
cancellation of projects or desire of clients not to spend IT budgets. In addition, the company also
indicated that they have not seen job losses among its clients set. Outperformance and
achievement of back-ended revenue growth guidance is contingent to some extent on decisions
on large engagements which may be taken in August/ September 2011. However, we would
caution investors and would not be surprised if revenue guidance beat is minimal in 2QFY12E.
Stock correction presents a good buying opportunity
After recent correction, Infosys trades at 18X FY2012E management guided EPS and 17X on
consensus numbers. We find the valuations attractive and believe that the markets are already
building in possibility of guidance miss in FY2012E and weak FY2013E performance. Assuming
that the stock trades at mid-cycle multiple (essentially implying modest market share gain for 3-4
years followed by no market share gain scenario to perpetuity), stock price builds in an EPS in the
Rs130-145 range in FY2013E, easily achievable in our view even in a distressed scenario. We will
review our estimates and target price shortly. Our current target price of Rs3,400 is based on
peak-cycle multiple of 20-22X. Exhibit 1 details pricing/ volume downside scenarios on Infosys.
No upside from pricing near term
Infosys reiterated multiple times that the core ADM services are getting commoditized at a
brisk pace. Infosys has effectively recognized the imperative to invest in next generation of
services viz. business transformation and innovation. We would not be surprised if pricing
remains under pressure for core services but this can be mitigated through change in service
mix and outcome-based pricing models.
Reasonable momentum in financial services vertical
Infosys has a strong financial services practice and works with most of the large
organizations globally. Infosys has comprehensive integrated service offerings across all the
micro verticals and tools/ solutions to accelerate/ speed delivery and time-to-market. Infosys
has witnessed a steady stream of projects and can sustain business momentum in FSI in the
near term.
Telecom vertical will continue to be a drag for the next two quarters
Infosys’ telecom practice has been a drag with revenues concentrated in wireline segment
and developed markets. Infosys expects gradual correction in this skew of revenues. This
would be partly achieved through mining of rich client base and partly through leverage of
solutions and business transformation capabilities. Infosys works with 8 of top-9 cable
companies in US, 6 of top 10 wireline players globally and 5 of top-10 wireless companies.
Infosys recently won two large transformational deals in the wireless space.
However these wins may not be enough to offset impact of ramp-down from select wireline
customers in the near term. For example, BT has started a process of re-tendering major
portions of its IT outsourcing portfolio. Business being done by all vendors (TM, Infosys and
TCS are among the larger vendors for BT in India) is likely to be up for re-bid.
We expect telecom business to underperform corporate average growth in FY2012E.
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