>Infosys Technologies Ltd (INDIABULLS)

Bleak near-term outlook
Infosys Technologies Limited (Infosys)’s result for FY09 was in line with our estimates. For Q4’09, Infosys reported a decline of 2.6% qoq to Rs. 56.4 bn in its top line largely due to increasing pricing pressure and sluggish volume growth, partially offset by the depreciation in the rupee against the dollar. Besides, revenues in the USD terms went down by ~4.5% qoq. Other than this, weak operational performance and increase in the SG&A expenses led
to fall in the EBITDA margin by 154 bps qoq to 33.6%.

Price erosion is inevitable
Billing rate for the quarter went down 2% and 4.2% qoq for onsite and offshore, respectively, indicating that clients renegotiated their contracts and new deals were signed at lower pricing. In our view, this trend is likely to continue, considering that the large clients from the developed economies are likely to demand price cuts. Thus, we expect billing to decline by 2–3% per quarter for the next 4–5 quarters.

Client engagement to help in the medium term
Infosys is focusing on client engagement and has guided to increase its selling & marketing efforts in the near term. Consequently, we expect SG&A expenses to increase by ~5% in FY10, which will strain the margins in the near term. However, this can benefit the Company in winning large deals in the medium term.

Potential strategic acquisitions to strengthen its positioning
Infosys has a strong balance sheet position along with a huge liquidity advantage in the current weak market scenario as it maintains a cash balance of USD 2.2 bn. In our view, the Company can use cash for strategic acquisitions in the next 12–15 months, which will strengthen its service offerings. Moreover, potential acquisitions in high end services such as consulting and system integration space can help to revive the margins.

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