Key Data

CMP Rs 1750.75

Sector Software

Face Value Rs.5

BSE Code 500209

52 Week H/L Rs 2415/ 1517

Market Cap Rs 95235 Cr

Investment Rationale

Infosys is the leading Software Company in India and is held in high esteem by clients and competitors alike. The company witnessed growth of 6.3% q-o-q and 20.4% y-o-y in top line to Rs 4542 crore. The net profit declined by 5.1% q-o-q and 2.1% y-o-y to Rs 1168 crore, while the EBIDTA margins declined by 80 bps at 32.5% in Q3 FY08. The company is witnessing strong sequential growth in Maintenance, Package Implementation, Testing and BPO services. While in terms of verticals it is witnessing strong growth in BFSI, Retail and Services sectors. Though the company’s growth slowed down in Q3 FY08 vis-à-vis its robust growth in Q2 and Q3 of FY08 quarters, it has exceeded guidance. The company’s books reflect healthy financial performance with cash and cash equivalents of Rs 6950 crore as on date. Also it has superior compelling value proposition to offer to its clients and higher EBIDTA margins compared to its peers. Thus the company still has strong potential for growth in future and based on the strong expected earnings in the next year, we recommend a buy on the stock with a long term view.

Despite current trends which have lead some operators to decline pricing or maintain current levels, Infosys has been able to record a marginal increase of 0.24%y-o-y in billing rates during Q4FY08 and 5.6% y-o-y. Offshore billing rates have increased 0.53% y-o-y while volumes on the top 10 clients grew 12% y-o-y. This trend was supported by the company’s policy to be selective in accepting contracts, maintaining revenue productivity and deep client relationships. Given the flat trend in Q4FY08, and the current US economic environment the company has guided towards stable pricing trends in FY09.

Infosys plans to hire about 25,000 candidates in FY09, which are about 8,000 less than FY08 levels as the company expects the first two quarters of this year to go slow. Of the 25,000-strong recruitment planned, 18,000 campus offers have been made. Typically, 70- 75% of these offers are converted into recruitment. In Q4FY08, the company added 2,586 employees and recorded a decline in attrition to 3.8% compared to 4.0% in Q4FY07. This contributed to a decline in utilization Q4FY08, and is expected to improve in Q1FY09 to 76.5%

At the CMP of Rs 1750.75, Infosys is quoting at a PER of 21.85. On EV/Sales and on EV/ EBIDTA basis it is quoting at 5.46x and 17.38x respectively based on consolidated twelve months earnings ending as on Mar’08.