Infosys Technologies (CMP: Rs2410)
Mkt Cap: Rs1.38tr; US$28.7bn Bloomberg code (INFO IN)
US and other developed economies are well on the way to a recovery by end-CY09 – as reflected in the various positive data points. IT spends are bound to recover, albeit with a 2-4 quarter lag, and we see Infosys Technologies (Infosys) as also tier1 IT services vendors well placed to increase their wallet share in CY10 and CY11. We expect sustainable ~20% growth in Infosys's revenues starting FY12. Focus on client mining and established expertise in high growth services would help Infosys gain market share. We have raised our FY10/ 11E EPS by 8-15% to build in the operational/ STPI benefits. Reiterate Infosys as Outperformer and our top pick in the Indian IT space with an 18-24 months price target of Rs3,200. We believe premium valuations of 22-24x are sustainable in an upgrade cycle, especially when earnings growth is accelerating. A near-term weakness, if any, should be used to buy into the stock.
Improving business outlook: IT spend, a late cyclical, is expected to improve in CY10/ CY11 led by the global economic recovery. While IT budgets for CY10 will likely remain flat yoy, the actual IT spends may exceed budgets with the recovery gathering pace. We believe Infosys (as also other tier 1 firms) is well placed to benefit from the upturn. Infosys – by displacing competition in vendor consolidation processes at several of its key accounts – has gained a higher wallet share, that too in a tough business environment.
Expect strong traction ahead, upgrades likely: We expect ~11% revenue growth for Infosys in FY11 and ~20% in FY12 on the back of economic recovery-led acceleration in IT spends. We discount the management's conservatism as the philosophy of reinvesting excess margins into the business indicates that it is confident of a business recovery ahead. We have raised our FY10/11E EPS by 8-15% and expect 22% EPS growth in FY12 as we expect the recovery to gather pace over the next few years.
Premium valuations sustainable: We believe valuations will sustain at current levels (21x FY11E earnings) as the stock has already entered a 2-3 years long earnings upgrade cycle. Between May '03-'05, the previous upgrade cycle post the US recession, Infosys saw an EPS upgrade of 40-70% over FY05-06 and the stock returned 200%+. Reiterate Outperformer with an 18-24 months price target of Rs3,200 (23x FY12E earnings). We see a short-term weakness, if any, as an opportunity to buy into the stock.
Key financials
As on 31 MarchFY08FY09FY10EFY11EFY12E
Net sales (Rs m)166,920216,930222,787241,116280,732
Adj. net profit (Rs m)46,59059,88058,71165,12079,711
Shares in issue (m)572573573573573
Adj. EPS (Rs) 81.5 104.6 102.5 113.7 139.1
% change 21.9 28.3 (2.0) 10.9 22.4
PE (x) 29.6 23.0 23.5 21.2 17.3
Price/ Book (x) 10.0 7.6 6.1 5.0 4.0
EV/ EBITDA (x) 25.0 17.8 17.3 15.5 12.6
RoE (%) 37.2 37.4 28.6 25.8 25.8
RoCE (%) 37.0 40.2 31.0 27.2 26.5
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