INFY | Infosys Stock Update 19th June 2009 | Infosys | Infosys Technologies | Information Technology Stocks

Company Name	-	Infosys Technologies
Research Firm	-	Emkay Research
Research Analyst	-	Manik Taneja
Recommendation	-	Hold

Emkay Research has advised "HOLD" for Infosys Technologies.

Our recent interactions with Infy management indicate of more confidence within the company about the demand/volume pick up with co appearing more hopeful about a volume pick up from Oct’09 onwards (V/s April’10 earlier). Co cites increase in deal pipeline/ contract negotiations with some integration related business opportunities emerging in financial services (e.g. BofA+Merrill Lynch etc) and a slightly more confidence on business prospects (V/s peers like TCS) from the Manufacturing vertical. We expect (1) Infy to beat upper end of Q1FY10 US$ revenue guidance (revenue guidance of US$ 1,060 mn-1,080 mn) on account of cross currency benefits highlighted earlier in our mail: Cross currency: From Foes to Friends) and (2) a revision in US$ annual revenue guidance to ~US$ 4,475-4,615 mn (a YoY decline of 4% to 1%) however would rule out any volume led revision in annual revenue guidance. We note that ur estimates already build in volume pickup from H2FY10 onwards (7.2%/13.2%/13.1% vol growths for FY10/FY11/FY12 respectively) and estimate EPS of Rs 106.3/Rs 118.2 for FY11 /FY12. Valuations at 16.5x FY11 earnings make us biased towards the downside.

Maintain HOLD with a revised TP of Rs 1,640 (V/s Rs 1,330 earlier) as we roll forward target to March 11 V/s March’10 and reduce WACC assumptions by ~100 bps.

Circumspect mood changes to a more optimistic one

Infosys Technologies sounded more optimistic as compared to the annual commentary during April’09 with the co believing that it has put the ‘worst behind it’ with client behavior returning to normalcy in terms of deal discussions. We note that some form of confidence from Indian techs could be emerging from the absence of any major upheavals/negative news from US and Europe which remain the key to decision making on cost saving outsourcing deals.

Cross currency benefits could aid in Infy beating US$ revenue outlook

Cross currency benefits in the form of GBP, Euro strengths V/s US$ would aid the US$ revenues for Indian offshore players. (as indicated by us a few days ago in the mail: Cross currency: From Foes to Friends). We estimate Infy could report revenues of US$ 1,084 mn (-3.3% QoQ, -6.1% YoY), marginally ahead of Infy’s revenue guidance at the upper end. Further we expect Infosys to increase FY10 revenue guidance to US$ 4475-4615 mn (a YoY decline of 4%-1%) as compared with a revenue guidance of US$ 4,350-4,520 mn (a YoY decline of ~7%-3%). However note that we do not expect any volume led increase in US$ revenues.

BFSI seeing some stability; some integration related opportunities emerging

Infy management noted that the business from financial services could see some stability going forward as well as indicated the possibility of integration related opportunities arising at US financial services clients (e.g. BofA+ Merrill Lynch combine, JP Morgan+WaMu, Wellsfargo+Wachovia). Further Infosys remains confident of continuing it’s strong performance in business from the Manufacturing vertical (note that revenues from the Manufacturing vertical were up by ~51% YoY and contributed ~65% of incremental revenues during FY09).

Maintain FY10/FY11 EPS estimates; Introduce FY11 estimates

We have tweaked our FY10 revenue/EPS estimates marginally (for cross currency benefits only) to Rs 100.4 (V/s Rs 99 earlier) while leave our FY11 estimates unchanged at Rs 106.3. We also introduce FY12 estimates and roll forward our target price to March 11 V/s March’10 earlier to Rs 1,640, implying ~15.5x 1 year rolling forward earnings. (V/s Rs 1330 based on a 1 year rolling forward P/E of 12.5x, an increase in P/E multiple is driven by ~100 bps reduction in WACC assumptions). We see downside risks to price on absolute basis from current levels. Key risks o our call emanate from adverse currency movements and income tax benefit extensions.

Sharp stock run up in the recent past leaves little upside

The Tier 1 IT services stocks have run up sharply in the recent past ( for price performance refer table below driven not by any major earnings upgrade in the sector but rather re-rating for the sector with the stocks now trading at ~13x-17x FY11E earnings now as compared with ~7x-12x in the recent past. In our view the stocks seem to be discounting sharp bounce back in revenue growth for the sector as compared to a gradual up tick in volumes/revenues envisaged by us (to cite our current estimates for Infosys factor in a 2.7% revenue CQGR over the next 12 quarters till FY12, volume growth of ~7.2%/13.2%/13.1% for FY10/FY11/FY12 respectively).

My View : Overall Information Technology sector is going through a transition phase. Global economic recession, outsourcing controversy, satyam scam - there is no clear picture how this sector is going to behave in near future. This is certainly not the time for lump sum investment in this stock. But if you are looking for investing in this stock for more than 5 years, than accumulating this stock on a regular interval is a good option.

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