INFOSYS TECHNOLOGIES LTD
PRICE: RS.2440 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.2472 FY11E P/E: 20X
Infosys held its Analyst Day recently, where it articulated its long term
strategy of providing services through new engagement models. The
company plans to increasingly move to these models to maintain
positioning and conquer competitive pressures. On its near term outlook,
the company painted an improving environment but at the same time
cautioned against exuberance. The company has indicated higher velocity
in decision - making by clients. It is investing significantly in its demandgeneration
initiatives and has also embarked on a move to reorient its
delivery organization. We tweak our FY11 EPS estimates to Rs.118 (Rs.115
earlier) and our price target to Rs.2472 (v/s Rs.2363 earlier). We remain
optimistic on the company's future prospects, led by a strong management
team and continue to recommend an ACCUMULATE.
Key takeaways of the Analyst Day
Aspirations for the long term
The management gave a glimpse of its aspirations for the long term. The
aspirations integrate the emerging business dynamics with Infosys' pursuit of
maintaining its client positioning and conquering competitive pressures.
Clear cut targets towards achieving revenues from new engagement models and
reducing geographical imbalances reflect the internal preparedness of Infosys.
While most companies are looking at these initiatives, Infosys has internally reorganised
itself to meet up to the new challenges, we opine.
Most of these initiatives have been going on for the past few quarters and have
been adequately formalized within Infosys now. With the traditional business
models likely to witness significant pricing pressure on being commoditised, Infosys
has formalized targets to move to more value - added services and newer
engagement models.
A) Higher contribution from new engagement models and nonlinear
initiatives:
Infosys has set targets to achieve equal proportion of revenues (1/3rd each) from :
1. Transformational projects
Infosys has been focusing on transformational projects over the past few quarters
now and plans to take the contribution of these services to about one third of total
revenues over the next few years. The company has been winning several deals
with 8 new deals won in 1HFY10 itself. Currently, the contribution to revenues is to
the tune of about 25%, we believe.
2. Operations - ADM, BPO, IMS, etc (traditional services based on global
delivery model)
These services while increasingly facing competitive pressures, are expected to
contribute about one third of the revenues over the next few years as against a
much higher share today. We understand that, there will always be demand for
these services either from new verticals or geographies
On Tuesday the market remained highly volatile in the first half between the range of 5110 and 5080 levels. However,
in the second half it recovered quickly from day's lower levels and managed to close above the major level 5110/
17140. It was an indication that the market has squeezed bears and now the real test will come at 5185/17360 levels
around which, the market spent time of more than one month.
Sustenance of the market above the level 5185/17360 will lift the market to 5230/17500 level without any major
hurdle. In case the market opens lower then it should not sustain below the level of 5110/17140 in the second half, as
this will lead to steep sell off towards the end. For the day our advice is to trade cautiously at upper and lower
boundaries (5185/5110). Break out or break down buying is advisable only on sustenance of the market with average
huge volumes.
