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25 Apr 2007

Accumulate Infosys; target of Rs 2581: Networth


1.Highlights for the quarter :Robust outlook for the future with a hiccup in Q4FY07: Infosys has registered results of Q4FY07 at par with the street expectations. However, its guidance of 27-29% growth in revenues and 23-25% increase in its EPS gives increased confidence towards future outlook. This sets Infosys well on its path to register revenues in excess of $4bn for the next year. If we measure this quarter’s growth sequentially, we may observe it to be a little muted at 3.5%. This is largely due to clients’ reorganizing their budget lines and focusing high on spending towards 1st quarter of next year. This is also on account of 1.8% appreciation in the exchange rate (Re Vs $) from the last quarter.

2. Pricing premium: The new accounts are priced at a premium of 3-5% over the current billing rates and the existing accounts for renewal will come at 1.5-3%.With repeat business at 95% we expect Q3 FY07 to see 0.3% increase in billing rates on a blended basis.

3.Increasing Shift towards Europe de-risks dependence on one geography: Infosys will continue to increase its wallet share out of Europe, especially France and UK to 25% of the total revenues. Japan and Australia also expected to grow by 20% each.

4.Infosys BPO :We estimate the employee additions to increase by 25% sequentially from Q3 FY07. We expect the Low utilization (60%) and high attrition (38%) are potential areas of control to expand the margins from the existing 22%. The other subsidiaries, Infosys Consulting and Infosys China are still in the investment phase and are expected to break even in Q1FY08.

5.New clients for Finacle: Infosys Banking Product is expected to grow by 10% increasing its spread from India & APAC region to new clients in Europe.

6.Vertical Growth: We expect Telecom Vertical (20% of total revenues) will continue to be the margin driver for FY08. The margins in this vertical are as healthy as 39%. Besides, the Package Implementation will also lead the margin growth.

7. Valuations :We expect the premium on the company’s ADR to contract further from 9.8% (average of the past two-months) to 5% in a few weeks. We expect Infosys one-year forward P/E to move from 24.8 to 26. The stock currently trades at 24.05x FY08E and 19.4x FY09E. We recommend our investors to “Accumulate” with a price target of Rs 2581.

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