Infosys Technologies- Better prepared for a slowdown in FY13 :Motilal Oswal

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Infosys Technologies
Better prepared for a slowdown in FY13
Our top pick in the sector; Maintain Buy
 Differential in revenue growth rate vis-à-vis TCS more a function of revenue
declines from BT, expect convergence in FY13.
 In a position to manage margins better than peers during a possible
downturn, post the restructuring undertaken earlier this year.
 Buy with a target price of INR3,050 (20x FY13E EPS of INR152.5) - 23%
upside.
Revenue growth to converge with TCS in FY13
Infosys' core philosophy of having industry leading margins is driven by its strategy of
moving up the value chain. The company's differential in growth v/s TCS in FY10 and
FY11 can be attributed to revenue declines from its large client - BT (the account
declined from 10% of revenues to less than 2% of revenues currently), accelerated
growth in BPO for TCS post the acquisition of CGSL and the organizational restructuring
at Infosys. Headwinds of FY10 and FY11 are unlikely to repeat and Infosys is better
placed for FY13. Moreover our checks and media reports suggest that, the company
has a far more aggressive view on acquisitions than in the past to fill gaps in areas like
healthcare, products, solutions & platforms and in geographies like Germany and France.


Strategy of moving up the value chain yielding results
Infosys' strategy of moving up the value chain is yielding results, with the increasing mix
shift in favour of such services should drive mix-based pricing increase. In FY11, 40% of
Infosys' incremental revenues came from Consulting/Package Implementation/Systems
Integration (these services contributed 33% of overall revenues). This is expected to
increase its YoY realization by upwards of 3.4%, based on exit rate of 4QFY11. Moreover
the company plans to increase the multiplier effect of downstream revenues by its consulting
engagements from 3x to 8x (from ~USD600m to ~USD1.6b) over the next few years. To
achieve this Infosys plans to increase its headcount in consulting and system integration at
a CAGR of 58% (from 4000 currently to 10,000) over the next two years v/s its overall
headcount growth of 14% CAGR. The restructuring effort announced earlier this year
will also improve the company's ability to target large multi service, multi geography deals
by reducing the number of verticals from 8 to 5 and empowering vertical heads with a
larger P&L responsibility.


Better placed than peers to manage margins, post restructuring
Infosys went through organizational restructuring earlier this year, cutting the total number
of verticals and horizontals down to 8 from 15 earlier. We believe this would help maintain
utilization levels at 78-82% on a sustained basis (v/s average utilization of 75.4% over the
past 8 quarters), as the company benefits from better fungibility of resources across the
organization in FY13, post stabilization of the new structure in FY12. Moreover, this gives
Infosys more leeway to quickly respond to lower demand by reducing hiring for FY13.


Cutting revenue and EPS estimates; expect margins to sustain in FY13
In the wake of the global challenges and expectations of budget cuts, we have cut our
FY12/13 revenue estimates by 2.4%/5.7% and EPS estimates by 2%/4%. While our
margin assumptions are largely unchanged, the lower cut in EPS estimates is on account
of revised currency assumptions after the recent weakening of the INR.


Valuations attractive; Buy
Infosys is currently trading at 16x FY13E EPS of INR152.5. Historically, it has always
bottomed out at a multiple of 14x, excluding the aftermath of the Lehman crisis, when it
had traded at 11x for three months. We recommend Buy, with a target price of INR3,050
(20x FY13E EPS of INR152.5) - 23% upside.