>Infosys Technologies (CITI)

INFOSYS TECHNOLOGIES
COMPANY FOCUS

Buy: Worsening Outlook, But How Much Is Priced In?

* Management comments more bearish – not unexpected though — Our recent meetings with Infosys CEO, CFO and head of telecom vertical suggest a worsening outlook – not surprising given the macro. Confidence on margins remains high (as ever), but visibility on revenues is possibly lowest ever.

* Key comments on the outlook — (1) Budgets have less relevance — customers in cash conservation mode (2) Some existing projects coming to an end may not be replenished as deal velocity is low (3) Customers asking for price cuts (5-15%) – ~5% yoy price decline looks likely, in our view (4) Earliest possible recovery will be in mid CY10 (5) Telecom vertical outlook is challenging – best case seems to be flattish revenues next year.

* Management to continue to give guidance; flattish is best case, in our view — Management indicated that they will continue to guide based on the visibility they have at that point of time. However, given the challenging outlook, we would not be surprised if management guides to some decline yoy in revenues – flat revenue guidance seems to be the best case at this point of time.

* What is priced in? — Despite the worsening outlook, the stock has held up well, outperforming the Sensex by ~25% over last year. We believe “buy side” expectations have got reset to flat to some decline in revenues. Unless that worsens significantly, the stock remains a good defensive in the Indian market.

* Buy for better cost management/leverage to INR — Outlook for the sector is challenging; Infosys is relatively better on cost management and is best leveraged to INR. FCF yield of ~9% should also provide support.

To see full report: INFOSYS