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Infosys Technologies (INFO)
Technology
Making the right moves. Within the broader ‘Infosys 3.0’ agenda of moving up the
value chain, Infosys is making important moves to arrest recent relative revenue growth
underperformance versus peers Cognizant and TCS. New organization structure with
reduced number of P&Ls, people movement across roles, greater volume focus,
aggressive deal participation, and investments in consulting are some of these moves. A
catch-up could take a while, though we believe the steps are in the right direction.
Working on bridging revenue performance gap versus peers
Infosys has underperformed peers Cognizant and TCS on volume/revenue growth and TCS on
margin performance over the past few quarters. Excessive focus on profitability at individual unit
(vertical/geo/service line) level, which led to the company letting go strategic large deals, is partially
to blame. But more importantly, volume growth has suffered on account of (1) poor bench
management (despite low utilization, bench composition not managed well) and (2) lengthy
reorganization, which possibly disrupted client-facing activities. With management reorganization
now over, the company has increased focus on improving volume market share again and has
taken several steps, including
Reduced number of P&Ls in the organization – Infosys has reorganized internally into four large
P&Ls along industry verticals. Decision-making authority now lies completely with these vertical
heads. This is different from the earlier unit-level P&Ls across verticals, geographies and service
lines, with each of these having revenue as well as profitability targets. The earlier structure led
to loss of certain strategic deals (from an overall perspective) which did not meet the
profitability targets of some of the individual units.
Greater focus on volumes – especially increased level of aggression in gaining volume market
share in strategic relationships, even if the same comes with modest (though within reasonable
limits) hit on account profitability. The company has had some success in marquee deal wins
recently; however, a flow-through impact on financials could take a while.
Multiple changes in roles across the organization and in the front-end, especially in Europe. In
addition to the reorganization-led role changes, Infosys has inducted new front-end faces in
areas where the company has seen decline in deal participation in recent quarters.
Better bench management – the company’s assessment of broad-based growth (across verticals)
at the beginning of FY2011 backfired in a way – growth turned out to be concentrated in select
verticals (especially BFSI) and the company ended up with a thin BFSI bench and very low
utilization in some other verticals, especially Telecom. Infosys has increased focus on this aspect.
Investing heavily in business transformation and innovation
Infosys remains focused on its 3.0 agenda – ensuring a balance of revenues between
business operations (60% of revenues currently), transformation and innovation. Infosys has
accelerated investments in business transformation and already recruited over 1,500
consultants (PI and others) in North America and intends to recruit 1,500 consultants in
Europe. Infosys believes this would increase addressable opportunity, stickiness of revenues
and revenue productivity (which would enable protect profitability). We note that Infosys’
onsite cost per person has increased by US$1,000/month over the past five quarters due to
aggressive recruitment of consultants. The downside of this strategy is it increases cyclicality
in revenues which can hurt margins in the investment phase. Infosys is focused on
acquisitions to accelerate growth in business innovation.
Stock correction presents a good buying opportunity
After the recent correction, Infosys trades at 17.6X 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 a 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 a no market share-gain scenario to
perpetuity), the stock price builds in an EPS in the Rs130-145 range in FY2013E, easily
achievable in our view even in a distressed scenario. FY2013E FCF yield (on current EV) is a
healthy 6% on our current estimates and 5.4% assuming a distress-case scenario.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFO)
Technology
Making the right moves. Within the broader ‘Infosys 3.0’ agenda of moving up the
value chain, Infosys is making important moves to arrest recent relative revenue growth
underperformance versus peers Cognizant and TCS. New organization structure with
reduced number of P&Ls, people movement across roles, greater volume focus,
aggressive deal participation, and investments in consulting are some of these moves. A
catch-up could take a while, though we believe the steps are in the right direction.
Working on bridging revenue performance gap versus peers
Infosys has underperformed peers Cognizant and TCS on volume/revenue growth and TCS on
margin performance over the past few quarters. Excessive focus on profitability at individual unit
(vertical/geo/service line) level, which led to the company letting go strategic large deals, is partially
to blame. But more importantly, volume growth has suffered on account of (1) poor bench
management (despite low utilization, bench composition not managed well) and (2) lengthy
reorganization, which possibly disrupted client-facing activities. With management reorganization
now over, the company has increased focus on improving volume market share again and has
taken several steps, including
Reduced number of P&Ls in the organization – Infosys has reorganized internally into four large
P&Ls along industry verticals. Decision-making authority now lies completely with these vertical
heads. This is different from the earlier unit-level P&Ls across verticals, geographies and service
lines, with each of these having revenue as well as profitability targets. The earlier structure led
to loss of certain strategic deals (from an overall perspective) which did not meet the
profitability targets of some of the individual units.
Greater focus on volumes – especially increased level of aggression in gaining volume market
share in strategic relationships, even if the same comes with modest (though within reasonable
limits) hit on account profitability. The company has had some success in marquee deal wins
recently; however, a flow-through impact on financials could take a while.
Multiple changes in roles across the organization and in the front-end, especially in Europe. In
addition to the reorganization-led role changes, Infosys has inducted new front-end faces in
areas where the company has seen decline in deal participation in recent quarters.
Better bench management – the company’s assessment of broad-based growth (across verticals)
at the beginning of FY2011 backfired in a way – growth turned out to be concentrated in select
verticals (especially BFSI) and the company ended up with a thin BFSI bench and very low
utilization in some other verticals, especially Telecom. Infosys has increased focus on this aspect.
Investing heavily in business transformation and innovation
Infosys remains focused on its 3.0 agenda – ensuring a balance of revenues between
business operations (60% of revenues currently), transformation and innovation. Infosys has
accelerated investments in business transformation and already recruited over 1,500
consultants (PI and others) in North America and intends to recruit 1,500 consultants in
Europe. Infosys believes this would increase addressable opportunity, stickiness of revenues
and revenue productivity (which would enable protect profitability). We note that Infosys’
onsite cost per person has increased by US$1,000/month over the past five quarters due to
aggressive recruitment of consultants. The downside of this strategy is it increases cyclicality
in revenues which can hurt margins in the investment phase. Infosys is focused on
acquisitions to accelerate growth in business innovation.
Stock correction presents a good buying opportunity
After the recent correction, Infosys trades at 17.6X 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 a 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 a no market share-gain scenario to
perpetuity), the stock price builds in an EPS in the Rs130-145 range in FY2013E, easily
achievable in our view even in a distressed scenario. FY2013E FCF yield (on current EV) is a
healthy 6% on our current estimates and 5.4% assuming a distress-case scenario.
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