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Infosys Technologies
Reuters: INFY.BO Bloomberg: INFO IN Exchange: BSE
Ticker: INFY
NDR takeaways- still enough
headroom for growth
Improved business mix a key catalyst to medium-term business performance
We hosted Infosys' CFO, Mr. V Balakrishnan, for investor meetings in the US last
week. While it is too early to comment on the company's ability to beat and raise
earnings or FY12 revenue guidance in the Sept-Q (which is a much-needed
catalyst for the stock price), we are convinced that the company has a solid longterm strategy to improve business fundamentals over the next 3-5 years. We also
believe that the improved service mix should reap benefits over the medium term,
making it a fairly defensive stock. Reiterating Buy with a target price of INR3,200.
Potential for long-term growth of 20-30% yoy under the new business model
Management believes that India’s share of the global IT services spend is still in
single digits and there is enough headroom for growth. Thus, concerns over the
company’s ability to maintain its historically high revenue growth rates are
unwarranted. Infosys is thus targeting growth in higher value-added services. Also,
as the lower-margin, people-intensive operations business drops from 65% to
33%, utilisation rates diminish in importance. Moreover, with business
transformation and innovation accounting for two-thirds of the revenues of the
company, the total contract value of deal wins will be the key profitability driver.
Demand resilient despite volatility in the macroeconomic environment
Demand in all verticals except telecom continues to be strong. Moreover, unlike
the last downturn when growth in the flagship banking and financial services and
insurance vertical was dependant on discretionary spending, the majority of the
current spending is driven by compliance and regulatory changes. This leaves very
little scope for alterations in spending due to changes in the macroeconomic
environment. We would thus see the recent correction as an opportunity to buy.
Maintaining Buy with a target price of INR3,200 (28% upside potential)
We value Infosys at 21x FY12E/06 and a PEG of 1.1x. Key downside risks: (a)
global recession impacting IT services spending (b) greater-than-expected
appreciation of the rupee, (c) global vendor competition, and (d) stronger political
rhetoric against outsourcing affecting client spending
Valuation and risks
Valuation
We value Indian IT services firms on a PE basis relative to their historical trading range,
compared with both peers and growth rates. We value Infosys at 21x FY12E/06. While this
factors in the benefit from an uptick in spending across all key verticals and geographies and
a likely ramp-up in demand from potentially new avenues of growth like continental Europe,
cloud computing, etc, over the next three to five years, it also incorporates the risk to IT
services spending by clients on account of volatility in the macroeconomic environment. We
believe the multiple is justified since the company should report an earnings CAGR of 18.5%
over FY12-14E and is better positioned than it was in 2003 on such key factors as revenue
size, net worth, dependence on the US and client concentration. We intend to capture the
potential upside using the recent average PEG of 1.1x.
Risks
Key downside risks include a severe and protracted global recession, significant rupee
appreciation in the near term, global vendor competition, Infosys' execution on its consulting
agenda and its ability to maintain its premium position in terms of billing rates (and
consequently in margins) and managing rapid growth. We believe the rhetoric over
outsourcing will likely remain strong and may even become a sector overhang as political
pressure on outsourcing increases.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies
Reuters: INFY.BO Bloomberg: INFO IN Exchange: BSE
Ticker: INFY
NDR takeaways- still enough
headroom for growth
Improved business mix a key catalyst to medium-term business performance
We hosted Infosys' CFO, Mr. V Balakrishnan, for investor meetings in the US last
week. While it is too early to comment on the company's ability to beat and raise
earnings or FY12 revenue guidance in the Sept-Q (which is a much-needed
catalyst for the stock price), we are convinced that the company has a solid longterm strategy to improve business fundamentals over the next 3-5 years. We also
believe that the improved service mix should reap benefits over the medium term,
making it a fairly defensive stock. Reiterating Buy with a target price of INR3,200.
Potential for long-term growth of 20-30% yoy under the new business model
Management believes that India’s share of the global IT services spend is still in
single digits and there is enough headroom for growth. Thus, concerns over the
company’s ability to maintain its historically high revenue growth rates are
unwarranted. Infosys is thus targeting growth in higher value-added services. Also,
as the lower-margin, people-intensive operations business drops from 65% to
33%, utilisation rates diminish in importance. Moreover, with business
transformation and innovation accounting for two-thirds of the revenues of the
company, the total contract value of deal wins will be the key profitability driver.
Demand resilient despite volatility in the macroeconomic environment
Demand in all verticals except telecom continues to be strong. Moreover, unlike
the last downturn when growth in the flagship banking and financial services and
insurance vertical was dependant on discretionary spending, the majority of the
current spending is driven by compliance and regulatory changes. This leaves very
little scope for alterations in spending due to changes in the macroeconomic
environment. We would thus see the recent correction as an opportunity to buy.
Maintaining Buy with a target price of INR3,200 (28% upside potential)
We value Infosys at 21x FY12E/06 and a PEG of 1.1x. Key downside risks: (a)
global recession impacting IT services spending (b) greater-than-expected
appreciation of the rupee, (c) global vendor competition, and (d) stronger political
rhetoric against outsourcing affecting client spending
Valuation and risks
Valuation
We value Indian IT services firms on a PE basis relative to their historical trading range,
compared with both peers and growth rates. We value Infosys at 21x FY12E/06. While this
factors in the benefit from an uptick in spending across all key verticals and geographies and
a likely ramp-up in demand from potentially new avenues of growth like continental Europe,
cloud computing, etc, over the next three to five years, it also incorporates the risk to IT
services spending by clients on account of volatility in the macroeconomic environment. We
believe the multiple is justified since the company should report an earnings CAGR of 18.5%
over FY12-14E and is better positioned than it was in 2003 on such key factors as revenue
size, net worth, dependence on the US and client concentration. We intend to capture the
potential upside using the recent average PEG of 1.1x.
Risks
Key downside risks include a severe and protracted global recession, significant rupee
appreciation in the near term, global vendor competition, Infosys' execution on its consulting
agenda and its ability to maintain its premium position in terms of billing rates (and
consequently in margins) and managing rapid growth. We believe the rhetoric over
outsourcing will likely remain strong and may even become a sector overhang as political
pressure on outsourcing increases.
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