Recommendation: Buy
CMP = Rs 1,956 (as of Monday)
Price target = Rs 2,317
Key points:
· Infosys Technologies’ Q2FY08 results were in line with market expectations. The company posted a top line of Rs 4,106 crore (8.8% q-o-q growth), and a bottom line of Rs 1,100 crore (2% q-o-q growth). The guidance was muted with EPS growth hiked from 14.1% to 15.6% for the year. However, we believe there could be surprises as the possibility of large deals fructifying and pricing increases (Infosys is currently chasing 12-13 US$100 million deals and a large deal from British Telecom) have not been factored in. The company also hiked guidance for manpower additions from 28,000 to 30,000.
· Margins surprise: Infosys posted a robust 250bps (100bps = 1%) increase in margins aided by a 2.9% and 2.6% increase in onsite and offshore billing rates respectively, coupled with a 4% increase in utilisation (EBIDTA margins at 31.3% vs ICICIdirect estimates of 30%). However, margins for the year are likely to be in a range of 30%-31% considering the employee ramp up over the next two quarters.
· Robust client additions: Client additions at 48 were the highest over the last six quarters. They include 3 Fortune 500 clients. I believe this is a positive trend as new clients are acquired at higher billing rates and augurs well to offset the losses incurred on account of a strengthening rupee.
· Valuation: We believe the answer to an appreciating currency environment is growth and the ability to derive higher pricing from customers (see IT sector update: IT IT bang bang …). Infosys seems to have this antidote in ample amounts.
· I reiterate a performer rating on this stock with a price target of Rs 2,317, with a time frame of 6-8 months.
