Journalism of Courage
We received a business update from Infosys CFO V. Balakrishnan (August 27,2012). The stock has outperformed the Sensex by 8% over the last month on expectations of a near-term business improvement. The conversation with the CFO suggests there has been no change in the business outlook since the June quarter.
In the long-term,despite a supportive valuation,we are worried about market share loss,dwindling growth in traditional services,inferior positioning in the new growth market (Continental Europe) and reduced focus on less than-$50-million clients. Thus,we retain our Hold rating with a target price of R2,350.
Drop in discretionary spending continues to impact growth: There has been no change in the business outlook since the June quarter. While greater exposure to discretionary spending and negative operating leverage are likely to hurt revenue growth and margins in the near term,the significant rupee depreciation more than offsets the impact of these headwinds. For the long-term,we believe that the company is making the right investments to pursue high quality growth by making the desired changes in its business model to enhance market share in products. Despite the near-term challenges,Continental Europe is likely to be a key growth market over the long term.
No change in near-term business outlook: There is no change in the business outlook across sectors since the end of the June quarter. Global macroeconomic challenges continue to adversely impact customers IT service spending. Discretionary spending still happens sporadically. In general,customers are conservative and are focused on conserving cash. As a result,deferrals of decisions still happen with increased scrutiny of large projects.
Negative operating leverage hurting near-term earnings: The company continues to focus on high quality growth with stable margins and pricing. It has made a conscious choice of staying away from short-term focused,high risk commoditised business.
Most freshers to whom offers were made in FY12 will be joining in FY13e. With utilisation already low,this will increase costs further. Once growth picks up,margins would improve due to operating leverage.
Growth may pick up either due to (i) an improvement in the macroeconomic environment or (ii) customers adjusting to the changed business conditions and starting to live with them as there is a possibility that uncertainty in the macroeconomic environment will last longer. While there are no early signs of any of this,the US elections may be a turning point.
Multiple measures to improve share of platforms,products and solutions: A few important steps undertaken by the company to improve revenue share from product and solutions are:
(i) Traditional salespersons selling services are used for their customer contacts.
(ii) The company has a group of 3,500 people who are constantly looking at verticals,talking to clients and looking at emerging markets where they can sell IP.
(iii) While the company will be selective,most of its acquisitions will be in this space. To achieve a respectable level of business,acquisitions are a must.
Deutsche Bank
