india bulls infosys 20jan09

8/8/2019 India Bulls Infosys 20Jan09

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Please see the end of the report for disclaimer and disclosures. -1-

INFOSYS TECHNOLOGIES LTD

RESEARCH

EQUITY RESEARCH January 16, 2009

Well placed to weather near-term headwinds

Infosyss Q309 result was in line with expectations, despite pricing pressure

and slow volume growth. Revenues grew 6.8% qoq to Rs. 57.9 bn, helped by

the depreciation of the rupee vis--vis the dollar. Though revenues in dollar

terms declined 3.7% qoq, effective cost management and rupee depreciation

boosted the EBITDA margin by 199 bps qoq to 35.1%.

Volume growth to moderate: With corporate entities worldwide curbing

their IT spends, we expect new deals and ramp-ups to slow down across the

Services vertical. However, the Companys strong brand equity and

corporate governance standards may attract jittery clients of Satyam and

other small/mid-sized IT services companies to Infosys. This may lessen the

adverse impact of the global slowdown.

Pricing pressure is unavoidable: We expect the billing rate to decrease by

24% in the next 34 quarters, considering that large clients from the

developed economies may demand price cuts. However, Infosyss strategy

to focus on fixed-priced projects and value-based pricing is likely to ease

billing pressure in the medium term.

Focus on operational efficiency: Infosys is steadily improving its offshore

mix, which should help counter the pressure on the EBITDA margin aconstant currency (FY09 at 32% to FY10 at 31%). Moreover, we expec

wage inflation to fall in FY10 as the Company may reduce its offshore

bonuses.

Gaining footprints in high-end services: Infosys is gaining traction in high-

margin services such as Consulting, System Integration, and Infrastructure

Management. As a result, it is better placed than its competitors to provide

end-to-end solutions. This may further help Infosys to win large and

transformational deals in the medium-to-long term.

RESULTS REVIEW

Share Data

Market Cap Rs. 726.2 bn

Price 1,268.25

BSE Sensex 9,323.59

Reuters INFY.BO

Bloomberg INFO IN

Avg. Volume (52 Week) 0.4 mn

52-Week High/Low Rs. 2,017 / 1,040

Shares Outstanding 572.6 mn

Valuation Ratios (Consolidated)

Year to 31 March 2009E 2010E

EPS (Rs.) 102.7 85.9

EPS Growth (%) 26.4% -16.4%

PER (x) 12.3x 14.8x

EV/ Sales (x) 3.0x 3.1x

EV/ EBITDA (x) 9.2x 12.4x

Shareholding Pattern (%)

Promoters 17

FIIs 33

Institutions 9

Public & Others 42

Relative Performance

0

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Jun-08

Jul-08

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INFOSYS Rebased BSE Index

Infosys Technologies Limited Hold

Key Figures (Consolidated)

Quarterly Data Q3'08 Q2'09 Q3'09 YoY% QoQ% 9M'08 9M'09 YoY%

(Figures in Rs. mn, except per share data)

Net Sales 42,710 54,180 57,860 35.5% 6.8% 121,500 160,580 32.2%

EBITDA 13,920 17,940 20,310 45.9% 13.2% 37,600 53,040 41.1%

Net Profit 12,310 14,320 16,410 33.3% 14.6% 34,100 43,750 28.3%

Margins(%)

EBITDA 32.6% 33.1% 35.1% 30.9% 33.0%

NPM 28.8% 26.4% 28.4% 28.1% 27.2%

Per Share Data (Rs.)

EPS 21.5 25.0 28.6 33.3% 14.6% 59.5 76.3 28.3%


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RESEARCH


Improvement in operational efficiency

During the quarter, the Company recorded an improvement across al

operational parameters, such as the offshore mix, the fixed-price projects

mix, and the attrition rate. However, the utilisation level (including that of the

trainees) went down by 90 bps qoq to 68.5%. We expect the utilisation leve

to remain low at 6768% for the next 45 quarters, considering the slowing

deals inflow and ramp-ups.

Key Events

Infosys bagged a five-year, multi-million dollar deal from AstraZeneca. It

will provide end-to-end application maintenance services to AstraZeneca

in areas such as manufacturing, supply chain, finance, human resources

and other corporate functions.

Raiffeisen International selected Infosyss Finacle to standardise and

consolidate their technology platform.

Mercator, a Dubai-based business technology provider, has joined hands

with Infosys to establish an offshore development centre (ODC).

Downside Risks

A longer-than-expected recession in the developed economies

A more-than-expected appreciation of the rupee vis--vis the dollar

A greater-than-anticipated wage inflation

Upside Risks

An earlier-than-expected economic recovery in the developed economies

Further depreciation of the rupee vis--vis the dollar

4 5 .0

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ontribution

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O f f s h o r e C o n tr i b u ti o n F i x e d p r i c e P r o j e c ts


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RESEARCH


A less-than-anticipated wage inflation

Company Guidance and Our View

For FY09, Infosys has again reduced its revenue guidance approximately by

2% to 11.8%12.8% (USD 4.674.71 bn) in USD terms. We expect revenue

growth to remain around 12.1% for FY09 as deal ramp-ups decelerate. In

INR terms, Infosys has given an EPS guidance of Rs. 102.9 for FY09

However, we do not expect the Company to meet this target due to sustained

pricing pressure.

Outlook

We expect a weak operating performance from Infosys in the near term

because of the recession in the developed economies. Furthermore, we

expect billing to decrease by 24% per quarter in the next 34 quarters. Also

fewer client additions and slower ramp-ups are expected to lead to revenue

de-growth of 4.6% in FY10 in INR terms. However, we believe that Infosyss

strong brand equity, end-to-end delivery capabilities, and corporate

governance standards will ensure growth in the medium-to-long term.

Valuation

Our DCF valuation suggests a fair value of Rs. 1,325, assuming an 8% Rf, a

13.36% WACC, and a 5% terminal growth. While the stock has limited

downside risks, the near-term upside appears limited due to the expected

weakness in IT spending and the continuing recession in the developed

economies. Hence, we downgrade our rating on the stock to Hold.Key Figures (Consolidated)

Year to March FY06 FY07 FY08 FY09E FY10E FY11E AGR (%

(Figures in Rs. mn, except per share data) (FY08-11E

Net Sales 95,210 138,930 166,920 215,343 205,524 221,976 10.0%EBITDA 30,910 43,910 52,380 69,511 51,549 51,341 -0.7%

Net Profit 24,580 38,500 46,590 58,904 49,235 54,223 5.2%

Margins(%)

EBITDA 32.5% 31.6% 31.4% 32.3% 25.1% 23.1%

NPM 25.8% 27.7% 27.9% 27.4% 24.0% 24.4%

Per Share Data (Rs.)

EPS 43.8 67.6 81.3 102.7 85.9 94.6 5.2%

PER (x) 68.1x 29.8x 17.6x 12.3x 14.8x 13.4x


5/5

Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666

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RESEARCH


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india bulls infosys 20jan09

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