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UBS Investment Research
Infosys Ltd
D owngrade to Neutral [EXTRACT]
Our Buy thesis presumed a catch up in performance relative to TCS
Our Buy thesis was based on the view that Infosys’s relative revenue
underperformance to TCS would begin to narrow and that there was significant
earnings upside potential. With the weak start in Q1 FY12 and lower-thanexpected
Q2 FY11 guidance, we now think the relative underperformance is likely
to continue in FY12 as well.
Troubles with large clients could impact revenue growth
Infosys has significant exposure to large European banking clients, many of which
have announced headcount cuts and other austerity measures. British Telecom,
another large European client, has invited a rebid of its contracts, which could
result in pricing and volume pressure. We expect this to add pressure on revenue in
the next few quarters.
Why not a Sell?
We believe that any potential miss to FY12 revenue guidance would likely be
triggered by a slowdown in global IT spending, rather than company specific
reasons. We do not see a structural impact for the company as yet and view the
Infosys3.0 strategy as a step towards a clear direction for medium- to long-term
growth. We also expect the stock to perform at least in line with the sector in a
prolonged sectoral downtrend.
Valuation: lower price target from Rs3,550 to Rs2,450
We downgrade our rating from Buy to Neutral. We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool, assuming a WACC of 12.3% and a terminal growth rate of
3%. Our price target implies a one-year forward PE multiple of 17.2x.
Infosys Ltd
Infosys is the second largest IT services company in India with US$4.8bn
revenue and around 114,000 employees in FY10. Its services include application
development and maintenance, consulting services and package implementation,
business process management, infrastructure management, and testing services.
It provides these services to international clients through offshore development
facilities in India and other global centres. Infosys derives 66% of its revenue
from the US, 23% from Europe, and the rest from Asia Pacific.
Statement of Risk
We think the possibility of significantly lower revenue guidance led by the
potential macro slowdown is a key downside risk to our earnings estimates.
Appreciation of the Indian rupee against major global currencies could also
impact profitability for the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Infosys Ltd
D owngrade to Neutral [EXTRACT]
Our Buy thesis presumed a catch up in performance relative to TCS
Our Buy thesis was based on the view that Infosys’s relative revenue
underperformance to TCS would begin to narrow and that there was significant
earnings upside potential. With the weak start in Q1 FY12 and lower-thanexpected
Q2 FY11 guidance, we now think the relative underperformance is likely
to continue in FY12 as well.
Troubles with large clients could impact revenue growth
Infosys has significant exposure to large European banking clients, many of which
have announced headcount cuts and other austerity measures. British Telecom,
another large European client, has invited a rebid of its contracts, which could
result in pricing and volume pressure. We expect this to add pressure on revenue in
the next few quarters.
Why not a Sell?
We believe that any potential miss to FY12 revenue guidance would likely be
triggered by a slowdown in global IT spending, rather than company specific
reasons. We do not see a structural impact for the company as yet and view the
Infosys3.0 strategy as a step towards a clear direction for medium- to long-term
growth. We also expect the stock to perform at least in line with the sector in a
prolonged sectoral downtrend.
Valuation: lower price target from Rs3,550 to Rs2,450
We downgrade our rating from Buy to Neutral. We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool, assuming a WACC of 12.3% and a terminal growth rate of
3%. Our price target implies a one-year forward PE multiple of 17.2x.
Infosys Ltd
Infosys is the second largest IT services company in India with US$4.8bn
revenue and around 114,000 employees in FY10. Its services include application
development and maintenance, consulting services and package implementation,
business process management, infrastructure management, and testing services.
It provides these services to international clients through offshore development
facilities in India and other global centres. Infosys derives 66% of its revenue
from the US, 23% from Europe, and the rest from Asia Pacific.
Statement of Risk
We think the possibility of significantly lower revenue guidance led by the
potential macro slowdown is a key downside risk to our earnings estimates.
Appreciation of the Indian rupee against major global currencies could also
impact profitability for the company.
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