Sell Infosys Technologies - Too far too soon: Positioned for pullback - Elara Capital

• Infosys Technologies
• Rating : Sell
• Target Price : INR2,706
• Downside : 12%
• CMP : INR3,076 (as on 15 October 2010)

Too far too soon: Positioned for pullback

Volume growth at modest 7.2%; onsite shift drives top line

Infoys delivered a stunning 12.1% QoQ topline growth this quarter with a 160bps shift in effort mix. Onsite revenue share in the total revenue increased by 220bps QoQ, driving the blended billing rate up this quarter. We reckon that a lot of the onsite shift will reverse into offshore by Q4 of FY11 which explains the current muted guidance for Q4 (apart from the traditional conservatism of Infosys).

Guidance on bottom-line remains tepid in spite of topline

While the guidance on USD topline indicates an increased confidence on volume (in sync with the hike in gross additions target for FY11 from 36,000 to 40,000), Infosys management has effectively reduced margin expectations for FY11. This margin reduction has been largely been on currency but we believe that operating factors have also contributed in part. Our channel checks indicate that the pricing for new contracts has not exactly been at the level of existing contracts.

Business traction heartening, but poor visibility beyond 2 quarters

Consulting and PI has led the growth with 14.1% USD growth which explains the onsite shift (new projects as well as the fact that consulting and PI has more proportion of onsite revenue). Infosys has won nine large deals in 1HFY11 with two of them being non-effort based. Deals are broad based, across verticals and geographies.

Valuations and our take

We are largely maintaining our estimates. We have marginally upped the topline but cut down on the margins, implying that we remain largely unchanged on the bottomline. We maintain our target price at INR2706 and our rating changes to Sell. We note here that our rating is indicative of our view that investors should (continue to) be Underweight on the stock in their portfolio mix as we do not see enough positives from the results to justify the recent run-up.

Source : Equity Bulls

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