>INFOSYS TECHNOLOGIES (MORGAN STANLEY)

In-line Results; US$ Revenue Growth Remains Lackluster

Quick Comment: Infosys’ US$ revenues indicate that recovery is likely to be slow and protracted. One-time reset in EPS expectations of last quarter appears to be behind us and we do not expect any material EPS upgrades in the current quarter for Infosys. We believe the froth in the stock price should dissipate going forward as growth expectations moderate to more realistic levels.

US$ revenues disappoint: Q2 US$ revenue at US$1,154m (+2.9%qoq, -5.1%yoy) was below our and Street forecasts. Net profit of Rs15.4bn (+1%qoq, +7.5%yoy) was marginally ahead of our and Street estimates due to better-than-expected EBIT margin of 30.5% (+38bps qoq, +61bps yoy). Q2 rupee revenues of Rs55.85bn (+2%qoq, 3%yoy) were below consensus.

Rupee appreciation eroding EPS upside: FY10e guidance of Rs99.6-Rs100 (at Rs47/US$ for 2H) remains below our EPS estimate of Rs104.4. We believe at current levels the stock is already pricing in a beat of the current FY guidance. Q3 guidance at flat to 1%qoq revenue growth was inline with our forecasts.

Mid-year wage hikes to tame margin expectations: FY10e margins would be impacted by 8% offshore and 2% onsite wage hike from October onwards. Full-year margins are now expected to be in the range of -50 to -100bps yoy. We forecast EBIT margin at 29.1% (-60bps
yoy).

Mgmt comments:
1) Going forward, they expect competition to intensify amongst the larger vendors.
2) Clients expect the recovery to be protracted.
3) Expect next year’s budgets to be flat yoy for clients.
4) Price renegotiations are behind us and the pricing environment is stable.
5) If utilization improves, they would have the ability to invest more in the business
6) Game has changed: Seeing demand for more lateral hires in Infrastructure and Enterprise segment.
7) Believe the worst could be behind in telecom segment
8) Do not expect a budget flush from clients in 4Q. Mgmt expects clients to hold on to budgets and transfer it to 2010.
9) Declared an interim dividend of Rs10/share (flat yoy)

To see full report: INFOSYS TECHNOLOGIES