BUY Infosys

Infosys
BUY
Price: Rs2,788 Target: Rs3,200 (Mar’11)

CEO meeting notes – Geared for growth

* Client outlook positive, offshoring to increase: We recently met Infosys
CEO Kris Gopalakrishnan and came back positive on the medium term growth
outlook of the industry. Infosys clients believe the worst is behind them and
banking clients in particular are looking to invest for future growth which
could herald revival of discretionary spending. CY10 IT budgets have been
finalized for most clients – flat to marginally up, with higher offshore
allocation. Importantly, decisions are being made at a faster pace and deal
sizes are increasing for Infosys (US$200mn deal signed recently). To cater to
the increased demand, Infosys is hiring in full swing – 19k fresher offers
already made for FY11 (10k in the current qtr). With only ~120 clients from
the Fortune 500 list, Infosys sees tremendous scope to widen its client reach
and drive revenue growth in the medium-term.

* Vendor consolidation working in favor of tier-1 companies: Infosys CEO
indicated that most large clients are looking to work with 3-5 strategic
partners to drive efficiency. Almost all such deals have 1-3 offshore vendors,
which we believe is a favorable trend, manifested in two recent publicly
announced vendor consolidation exercises at Telstra and British Petroleum.
Infosys believes its ability to compete with global vendors has increased and
this is manifested in higher win rates.

* Demand is not fully back, upside still there: The deal pipeline has not fully
revived for transformational deals; however, strategic sourcing deals have
revived. Revival in transformational deals in CY10 can accelerate revenue
growth trajectory for FY11/12, in our view. Slowdown has accelerated
demand for new business/pricing models, platform/IP driven solutions and
we believe investments made in CY09 keep Infosys well positioned.

* Infosys is our top pick; earnings upgrade to support valuations: We
believe QoQ revenue growth will further accelerate from the current 5-6%
trajectory and significantly surprise consensus. In our view, stocks are likely
to trade above historical average multiples in an earnings upgrade cycle. We
reiterate positive stance on the sector and prefer large caps (Infosys, TCS and
Wipro all rated BUY). Our price target of Rs3,200 is based on 21x FY12 EPS.

Contact : +91 9822226867