Buy Infosys Technologies
Published on Wednesday, November 4th, 2009 at 12:03 PMAuthor: insightt95in (170 Articles)
Infosys Technologies
Buy
Price: Rs2,139 Target Price: Rs2,727
Powering ahead
Infosys, is in a sweet spot of growth, with BFSI vertical leading the
charge, top clients driving growth (top client to grow ~15-20%) &
favorable outcome in vendor consolidation deals. In the medium
term Infosys’ unrelenting margin focus will result in superior EPS
growth. While the revenue and EPS growth declined during
slowdown, free cash flow generation saw a significant increase.
We value Infosys at 20x 1-year forward EPS and set December
2010 PT of Rs2,727 (28% upside). Buy the cash machine.
* Transformational deals at BFSI clients driving growth:
Involvement in at-least 5 integration deals with banking clients, ramp
up in top client (unlike FY09 when top client had a steady decline) and
top 10 clients, favorable outcome in vendor consolidation deals,
December quarter guidance and management commentary all point
towards acceleration in growth trajectory for Infosys. Revenue growth
momentum in FY11/12 is likely to surprise consensus in our view.
* Investment in sales & marketing ahead of growth: We note that
Infosys sales & marketing headcount will increase by >50% against
revenue growth of 13% over FY08/10E. This we believe should address
concerns on under – investing in S&M. Infosys revenue/client is
significantly higher than competition which aids SG&A efficiencies.
* Our estimates are conservative: a) We don’t factor acceleration in
revenue growth trajectory, b) forecast margin decline from 2QFY10
levels & c) build in 5% currency appreciation in FY11E (USD/INR:
44.5).
* Valuations to reflect operating performance: We note that EPS
(INR terms) growth during FY09-12E is adversely impacted due to a)
6% INR appreciation & b) 8% increase in tax rate. In our view EBITDA
growth (USD terms) – we forecast 19% growth over FY11E-12E, is a
true reflection of the business fundamentals and valuations should
reflect the same.
Sweet spot of growth
Infosys is in a sweet spot of growth, with both company specific dynamics
a) Top clients driving growth, b) transformational deals driving growth in
BFSI, c) favorable outcome in vendor consolidation, and industry
dynamics – a) CY10 IT budgets likely to be flat to up, b) BFSI (largest
vertical) is the first to recover, & c) recovery/stability in US economy.
Our channel checks indicate revenue growth over the next 4 quarters is
likely to surprise investors positively. Even though we have factored in 4-
5% q-o-q revenue growth (US$ terms), we will not be surprised with
revenue growth hitting 6-8% range. Sudden deterioration in global
economy is a key risk to our call. Buy.
Note: More intra-day opportunities will be provided
live during the market hours
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