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Infosys Ltd (INFY.BO)
Neutral: Caution is the Better Half of Valor
Macro environment still uncertain — The demand outlook is uncertain due to a
lack of clarity on spending velocity over the course of CY12. Infosys believes that
double-digit growth is possible for the industry if there is no macro catastrophe,
albeit with a higher QoQ volatility due to rise in shorter cycle projects and varying
spending velocity. While pricing was stable, there could be a possibility of not
receiving standard cost of living increases if the uncertainty were to continue.
Outsourcing opening up, Europe driven — Europe could be a better market
next year driven by an increase in outsourcing. The UK and Switzerland are the
key markets for Infosys in Europe, which are stable. In the newer markets,
culture is emerging as a major determinant of the extent of offshoring – is seeing
Germany opening up, while France and Japan could take longer.
Discretionary spends still a little slow — There is no deterioration in decision
making since Q3. While large project roll-outs (18-20mths) are not happening,
clients continue to go ahead with shorter tenor (3-6mths) projects. With
customers opting for higher variability in spending, Infosys expects traction to
pick up in segments like SaaS, cloud etc.
Need to focus on non-linearity — (1) Commoditization of services like ADM -
ADM pricing has not gone up since 2002; Infosys has coped by increasing
Consulting and System Integration activities. (2) Constraints of Scalability – A
constrain on quality supply has necessitated higher fresher training from 3m to
6m – despite which there is a ~5% drop-out. Currently, IP-based revenues form
~5% of the total.
Areas of investment — (1) Product IPs – Infosys has ~3500 people working
internally on this initiative. However, management concedes that the growth
cannot be all organic (It will take a long time to ramp up IP organically) and will
have to explore inorganic opportunities as well. Thus the company has no plans
of raising dividends at this juncture. (2) New technologies like cloud and mobility -
Mobile is huge opportunity with 4G roll-out in India likely to happen soon and
opportunities for solutions like mobile wallet.
We remain Neutral — We remain Neutral on Infosys, given the macro
headwinds. Infosys is up 6% YTD, and trades at ~17x FY13E. Recent data points
in the US are more positive – however, any revenue upside should be offset by
the recent INR appreciation (~7% YTD).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Ltd (INFY.BO)
Neutral: Caution is the Better Half of Valor
Macro environment still uncertain — The demand outlook is uncertain due to a
lack of clarity on spending velocity over the course of CY12. Infosys believes that
double-digit growth is possible for the industry if there is no macro catastrophe,
albeit with a higher QoQ volatility due to rise in shorter cycle projects and varying
spending velocity. While pricing was stable, there could be a possibility of not
receiving standard cost of living increases if the uncertainty were to continue.
Outsourcing opening up, Europe driven — Europe could be a better market
next year driven by an increase in outsourcing. The UK and Switzerland are the
key markets for Infosys in Europe, which are stable. In the newer markets,
culture is emerging as a major determinant of the extent of offshoring – is seeing
Germany opening up, while France and Japan could take longer.
Discretionary spends still a little slow — There is no deterioration in decision
making since Q3. While large project roll-outs (18-20mths) are not happening,
clients continue to go ahead with shorter tenor (3-6mths) projects. With
customers opting for higher variability in spending, Infosys expects traction to
pick up in segments like SaaS, cloud etc.
Need to focus on non-linearity — (1) Commoditization of services like ADM -
ADM pricing has not gone up since 2002; Infosys has coped by increasing
Consulting and System Integration activities. (2) Constraints of Scalability – A
constrain on quality supply has necessitated higher fresher training from 3m to
6m – despite which there is a ~5% drop-out. Currently, IP-based revenues form
~5% of the total.
Areas of investment — (1) Product IPs – Infosys has ~3500 people working
internally on this initiative. However, management concedes that the growth
cannot be all organic (It will take a long time to ramp up IP organically) and will
have to explore inorganic opportunities as well. Thus the company has no plans
of raising dividends at this juncture. (2) New technologies like cloud and mobility -
Mobile is huge opportunity with 4G roll-out in India likely to happen soon and
opportunities for solutions like mobile wallet.
We remain Neutral — We remain Neutral on Infosys, given the macro
headwinds. Infosys is up 6% YTD, and trades at ~17x FY13E. Recent data points
in the US are more positive – however, any revenue upside should be offset by
the recent INR appreciation (~7% YTD).
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