Infosys' BFSI head: near term needs monitoring but medium term sees significant influx of new, sticky opportunity areas ::JPMorgan

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We  had a conversation with Mr. Ashok Vemuri, head  of  Infosys’ BFSI  business
and member of the  board. He suggested that, in the near term, macro uncertainty
is causing  delay in  decision making,  but  budgets are intact and contracts are not
being  cancelled.  Importantly,  there  is  significant  pick  up  in  activity  for
transformational work (primarily themes such as cloud, mobility & analytics). The
opportunity  size  from  consulting-led transformational  work should grow  rapidly
in the next 3-4 quarters. On the positive side, clients seem better prepared today.
 Near-term:  Uncertainty  makes  spending  environment  choppy,  decisions
are  getting  delayed,  but  budgets  remain  intact. Uncertainty  in  macro
environment has lengthened the decision making period/process and clients are
cautious in awarding new  projects. Though the  budgets are intact and  projects
are not being cancelled, budget allocations are not taking place at the expected
pace and  spending  vis-à-vis  is  reviewed  on  a  far  more  regular  basis  (in  some
cases  even  monthly).  Importantly,  the  nature  of  projects  in  discussion  has
changed and the focus is significantly more on the business side than technology
side. Understandably, a larger proportion of decisions are being taken by CXOs
(CEO,  COO,  CFO,  CRO)  and  not  by  technology heads. Interestingly,  some
banks are  pulling  back their investments  from emerging markets and  diverting
them into domestic/developed markets to innovate new products/services.
 Medium-long  term:  opportunity  size  from  transformational  business  and
themes  such  as  regulatory  compliance,  cloud,  mobility,  and  analytics is
likely  to  grow  rapidly  and  significantly  faster  than  expected. Mr.  Vemuri
pointed  out  that  the  demand  and  discussions  regarding  consulting-led
transformational  projects  on  these  themes  have increased  manifold. These  are
likely to be the most important revenue driver in the next 18-24 months (than 4-
5  years  expected  earlier). The  company  believes  that  the  market  is  likely  to
evolve dramatically  in the next  2-3  years. Infosys is counting  on this  upstream
business  to  drive  wins  in  the  downstream  business  (such  as  ADM,  testing,
infrastructure  management)  in  medium-to-long  term.  The  realization  from
upstream business, which is currently about one third of total BFSI revenues, is
meaningfully higher than  ‘bread-and-butter’ offerings. However,  Infosys is  yet
to build the kind of credibility in this business which Accenture or IBM enjoys.
 Clients  are  better  prepared  compared  to the last  downturn. During the
downturn in  CY08-09, clients  had  panicked  and  had  doubts  regarding  the
sustainability of their business. They were more focused on survival than growth
and long-term  strategy. The  discussions were then more  on  price and  program
cuts. This time, in his view, clients are better prepared and are focused on period
beyond  uncertainty (2-3  years’  horizon) and  macro  weakness.  They  are  more
interested in  positioning themselves  strategically  for  growth in the medium-tolong term and  uncovering  new  revenue  opportunities. They are  more  open to
engage in discussions on themes (cloud, mobility, and analytics) than price cuts.
 Investment view. We retain our year-long Neutral rating on Infosys; though we
are slightly more constructive now on Infosys than we have been in the past. We
believe  that  the stock  could  rebound  ~15-20%  from  current  levels over  9-12
months as the demand environment stabilizes and the P/E multiple normalizes.