Buy Infosys Technologies
Published on Friday, November 13th, 2009 at 12:30 PMAuthor: insightt95in (169 Articles)
Infosys Technologies
Buy
Price: Rs2,306 Target Price (Dec 10): Rs2,727
Power of cash flows
During slowdown (1QFY09-2QFY10), Infosys has maintained a
steady growth in cash flows (~40-45% y-o-y), despite a significant
decline in revenue and profit growth trajectory. Free cash
generation increase is driven by a) increase in EBIT margins by
~270bps & b) efficient working capital management (DSO down to
56 days from 72 days). Buy the cash machine for a ~20% absolute
upside.
* Receivables declined by 15% in past 6 quarters: Infosys absolute
receivables declined by 15% over 4QFY08-2QFY10, a testimony to
quality of client relationships and operational efficiency. Notably, this
was achieved in an extremely difficult economic environment. Further
encouraging is the fact that DSO for banking clients was ~30 days
against company average of 56 days.
* Free cash generation has remained steady: Infosys FCF growth
has remained steady at 46% y-o-y on LTM basis against flat revenues
and profits, driven by higher EBIT margins and efficient working capital
management. Infosys FCF generation has witnessed a steady increase
and is currently ~30% of revenues, highest in the industry.
* Revenue growth likely to surprise in FY11/FY12: As highlighted
in our note on Infosys titled “Powering ahead” we believe that revenue
growth is likely to surprise in FY11/12E. Infosys has the highest margin
buffer compared to peers and this should result in superior EPS
growth.
* Underperformance against peers set to reverse: Infosys has
underperformed peers on a relative basis, and this indicates moderate
investor expectations. We believe Infosys stock price
underperformance is set to reverse on the back of strong revenue
growth going forward. We reiterate Buy with a price target of Rs2,727,
based on 20x 1 year forward EPS.
Note: More intra-day opportunities will be provided
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