8/8/2019 Infy Thoughts

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Valuations

y Mostly valued on P/E basis. Some analysts have DCF based targets. DCF is abit iffy given high growth trajectory and uncertainty of growth normalization.Gives more value to a long term perspective w/o adequate consideration toshort/medium term concerns

y Recommended multiples at 20-22x at present. This seems like aboveaverage range. Is there a case for multiple contraction?

y What happens to multiples when Infy misses aggressive consensus forecasts?y Infy is currently trading at 23x modeled 2012 eps. It trades at 19x

consensus for 2012. Consensus target price implied multiple (on consensusestimate) is 22x.

y While the stock looks cheap on consensus 2012 eps forecast, the consensusforecast is not factoring in margin slide as a result of mostly volume drivengrowth + normalization of utilization big hiring margin slide on 300 bps

2012 eps growth

Strategy

y Have been trying to grow Europe revenue share to roughly same as US overthe last 2 years. While this has long term benefits, over the next 1-2 years,ROI on Europe investments will be low. This is linked to multiple contractionquestion?

y Have indicated retail segment as a potential growth area -- long term. Isthere anything on the horizon which is not being considered by forecasts

Short Thesisy Modeled eps is below consensus. While revenue growth of 20% is in line with

consensus, this may not translate to linear eps growth as implied byconsensus eps forecasts. Given their concerns on attrition, lifetime highutilizations, cost of service delivery will be higher well into 2012 as wage

hikes kick in and also additional hiring will bring down utilizations. Themargin decline will offset good revenue growth.y Infy is trading at 23x 2012 EPS modeled. It trades on 19x to consensus eps

for 2012. A 23x multiple for 2012 is high and there is a case for multiplecontraction as the revenue growth forecast for 2012 of 20% is aggressive andthere is potential for greater margin erosion than modeled. At 20x Infy PT is2,526 which is 9.1% below cmp.

y Higher costs associated with US/UK visas will dampen margins. This willbegin kicking in H2 2011.

Contra Thesis

y Infy has already rolled out good wage hikes and their brand as an employerwill give them some traction in dealing with wage hikes.

y New growth areas like telecom, retail, internet platforms etc could drivegrowth. Also through the downturn there has been good traction withrevenue growth slowing down to 4.8% at worst in FY2010.

y Higher utilizations could be a function of efficiency gains on account of InfysGlobal Delivery Model (GDM) and might be sustainable thereby headcountrequirement for the growth.

y Possible cost of delivery gains on account of GDM could keep margins stable.y Further strength in US$ could improve margins.

8/8/2019 Infy Thoughts

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Europe Situation

y Mgmt has commented that they have seen some early signs of slowdown inEurope especially in the BFSI in which Infy is the market leader globally asthe financial crisis worsens. As of now they are witnessing good activitytraction in BFSI, retail and manufacturing.

y They are generally cautious about growth ramp from Europe and do notforecast any significant pick-up for 1-2 years.y Will continue to invest in Europe in the face of slower growth.

Revenue growthy Assumed a revenue growth of 20% for 2012. This is in line with consensus

estimates.y Revenue growth will be largely volume driven (16%-18%). Thus triggering

recruitment drive for Infy.y Near term growth will come from a pick-up in BFSI, manufacturing, telecom.

Infy is market leader in BFSI and hence stands to gain from the near term

activity pickup in BFSI, hence a case for higher than industry growth. Thishowever also means that Infys growth will be activity driven rather thanpricing given that this is a bread and butter business and does not commandpricing power.

y Clients in the US will also be more cost focused and there is a generalsentiment in the US on the type of work being off-shored to Infy beingcommodity type of work. Thus pricing improvements are not likely to kick in,though volume growth will be healthy.

y Infy to lead growth through 2011-12 because of higher US and BFSI exposure

Industry Growthy India has a 51 per cent market share of the off shoring market.y Significant opportunities exist in core vertical and geographic segments of

BFSI and US, and emerging geographies and vertical markets such as AsiaPacific, retail, healthcare, and government respectively.

y Development of these new opportunities can triple the current addressablemarket, and can lead to Indian IT-BPO revenues of USD 225 billion by 2020.

y Nasscom base case industry growth for the off shoring market for India is13.3% CAGR till 2020.

y Near term risk is from slowdown in Europe.