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Infosys Neutral
INFY.BO, INFO IN
Will the Big 2 remain the Big 2? ... Spotlighting Infosys
in the context of the hardening battle for size honors
A large acquisition by Infosys in the offing? In order to keep its revenue lead
relative to Cognizant intact, it is logical to ask if a big acquisition by Infosys is
around the corner. Some investors argue that this move may give some breathing
time to the new Infosys management while not feeling pressure of being overtaken
by Cognizant. Others fear that such a move might only prove more vexing for
Infosys and its shareholders, given the company’s non-existent track-record of bigbang
acquisitions. We agree with the latter view though we note that Infosys has
always been disciplined in saying “No” to acquisitions that do not fully fit its
criteria.
Combating dissipation of pricing premium in recessionary times. As we have
repeatedly noted before, we believe that Infosys’ pricing premium (more so,
offshore pricing) is ebbing away. This process of diminution of Infosys’ pricing
premium was set in motion during and in the wake of the 2008 crisis when clients
became much more cost-conscious and forced multi-vendor situations, leveling
pricing across vendors. As the developed world grapples with renewed recession
fears, we see continued closing of this pricing premium.
Thus, it is imperative to improve positioning in “bread-and-butter” offerings
which constitute ~70% of the addressable market. Sure, Infosys’ focus on being
consulting-based has given it leadership in consulting, transformation & enterprise
solutions. But the larger opportunity pie lies in bread-and-butter offerings such as
infra management, ADM, testing & BPO, with profitability herein protected by
productivity, accelerators & outcome-based pricing. To address this relative gap,
Infosys has dedicated heads of business operations wedged into the four
consolidated verticals. Also, the over-concentration of managerial responsibility
seen in Infosys 2.0 is now not an issue in Infosys 3.0.
Investment view. Despite our Neutral rating, we are more constructive now on
Infosys than we have been in the past. Whichever way we cut our analysis, we
find it difficult to paint a scenario in which Infosys grows in FY13 at a single-digit
rate (in % terms). A 10% revenue growth in FY13E requires four successive quarters
of very slow sequential growth starting Sep-Dec11, which is a fairly conservative
assumption as a slowdown of this duration was not seen even in 2008-09. We
believe that Infosys stock should rebound ~15-20% from here over the next 9-12
months though we continue to prefer TCS (OW). Our reverse DCF framework
applicable across cycles supports this.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Neutral
INFY.BO, INFO IN
Will the Big 2 remain the Big 2? ... Spotlighting Infosys
in the context of the hardening battle for size honors
A large acquisition by Infosys in the offing? In order to keep its revenue lead
relative to Cognizant intact, it is logical to ask if a big acquisition by Infosys is
around the corner. Some investors argue that this move may give some breathing
time to the new Infosys management while not feeling pressure of being overtaken
by Cognizant. Others fear that such a move might only prove more vexing for
Infosys and its shareholders, given the company’s non-existent track-record of bigbang
acquisitions. We agree with the latter view though we note that Infosys has
always been disciplined in saying “No” to acquisitions that do not fully fit its
criteria.
Combating dissipation of pricing premium in recessionary times. As we have
repeatedly noted before, we believe that Infosys’ pricing premium (more so,
offshore pricing) is ebbing away. This process of diminution of Infosys’ pricing
premium was set in motion during and in the wake of the 2008 crisis when clients
became much more cost-conscious and forced multi-vendor situations, leveling
pricing across vendors. As the developed world grapples with renewed recession
fears, we see continued closing of this pricing premium.
Thus, it is imperative to improve positioning in “bread-and-butter” offerings
which constitute ~70% of the addressable market. Sure, Infosys’ focus on being
consulting-based has given it leadership in consulting, transformation & enterprise
solutions. But the larger opportunity pie lies in bread-and-butter offerings such as
infra management, ADM, testing & BPO, with profitability herein protected by
productivity, accelerators & outcome-based pricing. To address this relative gap,
Infosys has dedicated heads of business operations wedged into the four
consolidated verticals. Also, the over-concentration of managerial responsibility
seen in Infosys 2.0 is now not an issue in Infosys 3.0.
Investment view. Despite our Neutral rating, we are more constructive now on
Infosys than we have been in the past. Whichever way we cut our analysis, we
find it difficult to paint a scenario in which Infosys grows in FY13 at a single-digit
rate (in % terms). A 10% revenue growth in FY13E requires four successive quarters
of very slow sequential growth starting Sep-Dec11, which is a fairly conservative
assumption as a slowdown of this duration was not seen even in 2008-09. We
believe that Infosys stock should rebound ~15-20% from here over the next 9-12
months though we continue to prefer TCS (OW). Our reverse DCF framework
applicable across cycles supports this.
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