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Infosys Technologies Limited - Investment Thesis

Mr. Rahul Singh | Posted On Monday, October 13,2008, 02:38 AM

Infosys Technologies Limited - Investment Thesis

 

 

Company description
INFY is a leading global technology services firm and the second largest IT services company in India. The company provides solutions that span the entire software life cycle encompassing technical consulting, design, development, software re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. In addition, the company offers software products for the banking industry and business process management services.

Key investment highlights
• Global financial crisis and market uncertainty would take a heavy toll on outsourcing – Clients may postpone project till the financial tsunami wanes
• Current improvement in Indian revenue is more due to depreciation of Rupees w.r.t US $
• Adverse movement of Euros and Pounds (getting stronger w.r.t. US dollar) will affect dollar revenue by 2-3%
• Net margin may come under pressure in coming years due to pricing pressure in the industry
• Lost Axon acquisition to HCL which might lead to a delay in expanding in Europe and SAP Consulting market; hence, keep its exposure to the US market high

Key drivers
• One of the worst ever global financial crisis in the history with prolonged and global impact
• Lesser outsourcing revenues after bankruptcy and consolidation in the banking sector
• Though hiring has slowed down, Infosys crossed 100,000 employees mark with optimism

Sector views
IT sector like overall economy is going through a period of uncertainty due to the global financial crisis. BFSI (Banking, Financial Services and Insurance) segment, which consists of more than 30% of IT companies revenues, would be worst affected. This makes IT sector extremely vulnerable because at present nobody knows whether the worst has come or is yet to come. The US and European economies might go into recession, putting further pressure on outsourcing industry. We may witness some downsizing by these firms to cut cost and reduce bench strength in the short run.

Key risks
• Major economies such as US and Europe may go into recession
• BFSI segment which offer revenues more than 30% for most of IT firms will get even worst
• Increased competition from other IT firms; we saw HCL acquiring Axon and TCS winning some mega deals

Valuation

 

 

 

INFY

SATYAM

WIPRO

P/E (x)

FY08A

FY09E

21.3

16.8

15.3

11.6

20.3

17.2

P/B (x)

FY08A

FY09E

7.0

5.5

3.6

2.9

5.7

4.6

ROE (%)

FY08A

FY09E

36.8

37.0

26.0

27.6

22.8

19.5

Given the uncertainty in the market but solid business model, I recommend investors to take a long term view of the stock and market and HOLD on the stock. The market may improve in the next couple of months once the effect of bailout package by G7 nations is clear and visible.

Stock View
Maintain neutral (HOLD)

 

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