Reduce Infosys Technologies Ltd - Elara Capital

• Rating: Reduce;
• CMP: INR2,770 (as on 19 July 2010)
• Bloomberg / Reuters Code: INFO IN/INFY.BO
• Face Value (INR): 5
• Daily Vol. (3M NSE Avg.): 941,648
• Mkt Cap (INRbn/US$mn): 1,590 / 33,717

Near term pressures remain

We attended the Infosys Analyst day. From the various presentations as well as our one on one interactions with the business heads on the sidelines, Infosys management seems to be making a very distinct effort at bringing forth its non-traditional initiatives in the convergence of trends like cloud, newer modes of consumer interactions like social and professional networking sites, byte sizing and customizing of offerings by businesses and mobility. Infosys also came out with a rather educative presentation on the healthcare opportunity and its presence in different parts of the healthcare ecosystem.

We attempt to pick up a few pointers from different presentations that we think might be pertinent to investors:

Healthcare reforms – A bigger opportunity: Healthcare across the world is seeing an increasing trend of convergence in the sense that countries where healthcare liabilities were more skewed towards the public (like China) are opting for more private participation while in countries like the US, the reverse seems to be happening. We note here that the healthcare vertical for Infosys has been on a secular uptrend and never decelerated during the 'slowdown' quarters. Healthcare currently forms about 10% of the Infosys revenue.

Source of opportunity:

Y2k like shift from ICD9 to ICD10: The healthcare reforms bill mandates payers to be able to view the set of 'diagnostic codes' of individual patients on a real time basis. This necessitates what Infosys terms as an intricate set of 'many to many' conversions at the provider's end. Infosys has come up with a platform called 'itransform' to address this conversion. The deadline for this conversion has been set at 2013 and Infosys reckons this opportunity to be close to a billion in USD. Infosys has only one provider as a client on this platform currently and a chunk of the opportunity lies ahead.

'iexchnage': Every US state is mandated by the healthcare reforms bill to set up an 'iexchange' whereby the uninsured population in the US (around 40 to 50mn) would be able to buy insurance through some form of the government subsidy (like vouchers or transfer payments). The exchange should also be able to serve the high earning part of the US population looking for a more comprehensive coverage. The setting up of the exchange ecosystem is unfunded and would incentivize states to go for offshoring. This is an ecosystem play with multiple vendors and system integrators and per the Infosys estimate. The opportunity is likely to be worth around USD30-40bn.

Proprietary platforms and IP around end customer experience starting to bear fruit: The Infosys analyst day last year saw a prominent mention of attempts to build IP around platforms like 'iengage'(social commerce platform), Shopping 360 and Flypp (app store for service providers). In this analyst meet, Infosys has laid out how these platforms have been bundled with a solution offering (like iengage used within Digital Commerce Services and Solutions) to garner meaningful revenues. For example, Flypp currently has Airtel as its client.

The manpower conundrum: Infosys expects that the 15 to 19% wage hikes given out to the manpower band of between 3 and 7 years (the most susceptible bracket) will stem attrition from Q2FY10 onwards. Infosys also plans to induct a significantly larger proportion of laterals this year to make up for attrition in this band. This, however, means that the margin pressure seen last quarter would wind down at a slower than expected pace. We maintain our stance taken at the end of Q4FY10 results that the margin guidance given by Infosys for FY11 (at the end of FY10) is realistic and not conservative.

The Infosys management has also mentioned that the company has plans to start getting manpower for enterprise and consulting segment which can be billed at USD150 to USD170 per hour (like an IBM or Accenture). It plans to hire local consultants in this role and plans to have around 7000 people in this category by the end of three years from now.

What to do with the stock and the sector? The stock is trading at 22.3x its FY11E EPS. We do not expect any revenue upgrade in the next two quarters while the EPS upgrade will be hard to come by as Infosys invests for future growth. The sector indices will remain capped as macro data emanating from the US portends a pause in the recovery. On a stock specific basis, TCS and HCL Tech continue to provide more upside potential in the near term (even after the sharp run-up lately).

Source : Equity Bulls

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