Infosys - Strengthening its position - AXIS Direct

Key takeaways from our interaction with Basab Pradhan (Sr. VP Head of Global Sales, Marketing and Alliances Member of Executive Council) and Sandeep Mahindroo (Principal - Investor Relations):

- No material change in macro-environment with long decision-making cycle for large deals. However, there is uptick in Request For Proposals (RFPs) and deal pipeline is better YoY

- Continental Europe (13% of revenue), Australia (over 5% of revenue) among geographies and Infrastructure Management Services (IMS, 7% of revenue) among offerings gathering momentum

- Large deal wins, client mining (focus on 45 Star Accounts with USD 100 mn revenue potential, Q3FY13: 12) and broadening of client base (~160 clients signed in last 2 years) remain key growth strategies

- Maintain BUY with target price of Rs 3,602 (16x FY15E EPS of Rs 225): Initiatives taken by Infosys over past few quarters to improve volumes continue to bear fruits (with 8 large deals signed in Q3). Hence we expect Infosys to deliver a much better growth in FY14E vs. FY13. Rise in discretionary spend to drive earnings/ multiple upgrades.

Business update:

- CY13 budgets finalized on time, clarity on allocations awaited: CY13 budgets were mixed - BFSI (down) and Manufacturing/ Retail (flat with positive bias)

- Nasscom guidance not the ideal benchmark for Infosys' revenue growth: Nasscom has guided for 12-14% industry growth for FY14 (vs. ~10% in FY13). However, Infosys' higher share of discretionary portfolio and differentiated offerings - Products, Platforms & Solutions (PPS) - both aggregating to 40-45% makes it difficult to benchmark the company with Nasscom guidance. Also, Nasscom guidance has higher share of BPO (~20%, Infosys - 7%) and captives

- Focus on large deal/ clients yielding results: Infosys has created a special 'Strategic Global Sourcing' team of 70 people to target large outsourcing deals with special expertise in transition and transformation management. Infosys' positioning, investments, and cross-selling opportunities in Star Accounts get special attention and review from Senior leadership team. These accounts are targeted with a dedicated Client Partner and Star Program team. Benefits have started to accrue - 8 large deals closed in Q3 (USD 731 mn Total Contract Value: TCV)

- Outlook across verticals: Spend in Manufacturing and Retail vertical (aggregate revenue: ~38%) remains steady with some pockets of discretionary spend. In Financial Services (FS; ~34% of revenue), Insurance, Retail & Commercial Banking is relatively stable whereas Investment Banking continues to lag. Regulatory spend in FS to be the key growth driver. Telecom (~10% share) will continue to be a laggard

- Outlook across geographies: US remains fairly stable with macro data showing improvement. However,clientsare cautious on spending budgets.Positively, UK/Continental Europe continue to see good growth due to cost pressures at client-end. Continental Europe likely to better company average growth. Infosys' investments in Germany, France, Belgium, Netherlands and Switzerland are yielding better deal pipeline and improved client interactions. Lodestone acquisition (being integrated) to strengthen its presence in Continental Europe going forward. Q3 saw 3 out of 8 large deals from Europe

- Outlook across service offerings: Infosys' end-to-end offerings in IMS (vs. Remote Infra services few quarters back) and 'partnership approach'are driving better deal visibility/wins. Infosys is well placed to capitalize on upcoming large deal renewal market in IMS. TCV signings in PPS has almost doubled to ~USD 600 mn in past 4 quarters with new launches in every quarter, minimal competition, and cross-selling opportunities. Discretionary portfolio continues to be under stress

- Pricing: Application Development and Maintenance (ADM) and BPO continue to get commoditized. Infosys has been focusing on industry solutions, automation, productivity tools, platforms etc to offset this commoditization trend. At the portfolio level, pricing remains largely stable due to higher realizations in Enterprise and Consulting Services

- Non-top 10 clients growth to be higher than company average: Higher exposure of BFSI and Telecom clients in Top 10 is likely to keep growth from these clients under pressure. Infosys added ~160 clients to its active client base in last 2 years, which would support revenue growth as they start ramping up

- Specific to Q4FY13: Revenue visibility for Q4 is high at > 95%;unfavorable cross-currency moves to impact Q4;onsite salary hikes to be absorbed in Q4

- Key challenges: Low utilization due to demand-supply mismatch and global macro environment.

Source : Equity Bulls

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