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Infosys
Outlook
While near-term demand for the top-tier vendors is intact, uncertain global
macroeconomic outlook could weigh on clients’ CY12E IT budgets. This, in our view,
will only accelerate the need to cut costs and hence Indian IT services companies
should benefit from the increase in offshoring by clients. For the long term, we expect
Indian IT services companies to benefit structurally from increased outsourcing. We
believe that incremental demand should largely flow from 1) European geography, 2) an
increase in adoption of cloud computing and 3) improvement in discretionary spending
(revenue productivity is also set to improve further). Infosys, India’s No.2 offshore
services provider, is now a strategic partner to most of its large clients. With a high ROE
(+30%) and a strong balance sheet (+USD3.8bn cash balance), the company could gain
market share and/or in theory make EPS- and/or ROE-accretive acquisitions. We value
Infosys at 18x FY13E, given its earnings CAGR of 16% over FY12-14E. This translates to
a PEG of 1.1. We maintain our Buy rating.
Valuation
We value Indian IT services firms on a P/E basis relative to their historical trading range,
compared with both peers and growth rates. We value Infosys at 18x FY13E. The
lowered multiple factors in the increased macroeconomic uncertainty. We believe the
multiple is justified since the company should report an earnings CAGR of 16% over
FY12-14E and is better positioned than in 2003 on such key factors as revenue size, net
worth, dependence on the US and client concentration. We believe our use of the
stock’s recent average PEG of 1.1 captures the potential upside.
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 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
Outlook
While near-term demand for the top-tier vendors is intact, uncertain global
macroeconomic outlook could weigh on clients’ CY12E IT budgets. This, in our view,
will only accelerate the need to cut costs and hence Indian IT services companies
should benefit from the increase in offshoring by clients. For the long term, we expect
Indian IT services companies to benefit structurally from increased outsourcing. We
believe that incremental demand should largely flow from 1) European geography, 2) an
increase in adoption of cloud computing and 3) improvement in discretionary spending
(revenue productivity is also set to improve further). Infosys, India’s No.2 offshore
services provider, is now a strategic partner to most of its large clients. With a high ROE
(+30%) and a strong balance sheet (+USD3.8bn cash balance), the company could gain
market share and/or in theory make EPS- and/or ROE-accretive acquisitions. We value
Infosys at 18x FY13E, given its earnings CAGR of 16% over FY12-14E. This translates to
a PEG of 1.1. We maintain our Buy rating.
Valuation
We value Indian IT services firms on a P/E basis relative to their historical trading range,
compared with both peers and growth rates. We value Infosys at 18x FY13E. The
lowered multiple factors in the increased macroeconomic uncertainty. We believe the
multiple is justified since the company should report an earnings CAGR of 16% over
FY12-14E and is better positioned than in 2003 on such key factors as revenue size, net
worth, dependence on the US and client concentration. We believe our use of the
stock’s recent average PEG of 1.1 captures the potential upside.
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 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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