Programmed To Perform - Infosys Technologies

Most of the investors might get surprised to see Infosys Technologies as our choice scrip. And why not? With the US, which is the largest market for the IT players, reeling under recession and the exit of Nandan Nilekani (who will be heading a government project), investors are bound to be skeptical. But we feel that the exit of Nilekani may create an impact only in the short run because the company has enough talent to make up for any such short-coming. Further, in the past few months things have undergone a change on the global front indicating an improvement in some macro factors and this may make Infosys a good buy at its current level.

There are certain signs of revival in the US economy. Hence we feel that most of the negative news has already arrived, thereby capturing any downside risk to the number. Rather, we expect that the signs of recovery will help Infosys post higher single digit growth in terms of revenues against lower single digit guidance for FY10. Even the management believes that things are improving from their clients’ end, thus providing them the much needed volume growth. Further, the company is also eyeing an increased exposure to the Indian markets and the rest of the world which is expected to drive its growth.

But the biggest advantage in favour of the company is its cash and cash equivalents to the tune of Rs 9,695 crore which it may use for inorganic growth. On the valuation front, the scrip is placed comfortably where its CMP of Rs 1,796 discounts its FY10E earnings by 17.52x. Even the EV/EBITDA of 14x seems to be placed well. Our recommendation is that investors should buy the scrip with a target price of Rs 2,100 in the next one year.[PAGE BREAK] When Infosys announced its guidance for FY10 it gave out a muted one, indicating a 1.7 per cent revenue growth and a 7.7 per cent fall in EPS on the lower side. But we are of the opinion that the scenario has changed and hence the Infosys management may revise the guidance upwards. As mentioned earlier, there are clear signals of revival in the US economy. Various factors like recovery in the Tech Pulse Index, US Consumer Confidence Index and the peaked New Jobless Claims have pointed towards the positive. Further, the Infosys management itself believes that things are improving and more people are expected to opt for outsourcing. In a recent interview, S Gopalakrishnan, CEO, Infosys Technologies, said, “There is a lot more confidence amongst our clients and they feel that the worst is behind them.”

Further, the management has also noticed the possibility of stable pricing which will help Infosys capture the margin decline. It may also utilise its cash and cash equivalents for acquisitions. In fact, it is reported to be eyeing acquisitions in the emerging markets in the healthcare vertical. Additionally, the Indian market with its Unique Identification Number Program and the e-governance projects is expected to provide growth avenues along with an opportunity for geographical diversification. As regards the financials for FY10, Infosys has provided a revenue guidance of Rs 22,928 crore on the higher side and a bottomline of Rs 5,788 crore resulting in an EPS of Rs 101.18. But with the improved scenario we expect the guidance to be increased and hence recommend the investors to buy the scrip at its current level with a target price of Rs 2,100 in the next one year.