Buy Infosys

[insight]

Infosys
BUY
Price: Rs2,732 Target: Rs3,200 (Mar’11)

All set for a solid FY11

* Deal signings continue unabated: Our recent channel checks indicate that
Infosys has signed 4-5 large deals (each worth US$100mn) in the current
quarter. The deals signed are from energy and utilities (2), retail (1),
manufacturing (1) and healthcare (1) verticals. The deal signings are
significant as a) first quarter of calendar year is slow on deal closure front b)
vertical mix is diversified and indicates traction across verticals. Infosys
expects to sign two Europe-based telecom operators in the current quarter or
early next quarter.

* Deals from New Engagement Model (NEM) gaining traction: Two of the
largest deals signed are based on the NEM and are in Infrastructure
management (US$200mn+ over 5 years based on variable pricing model) and
BPO (US$150mn+ based on HRO platform) space. Additionally Shopping Trip
360 (Infosys’ IP based solution in retail vertical) is at pilot/live implementation
stage with 9 clients. Increased revenue contribution from NEM can also result
in higher margins going forward, in our view.

* Best Marquee client signings in CY09: As per management, CY09 had the
highest number of marquee clients wins compared with the last four years.
Our channel checks indicate that some of these clients are already ramping
up and could contribute significantly to FY11/12 growth. In our view, strong
revenue outlook from existing top clients and new marquee wins can result in
Infosys significantly outperforming peers.

* Investments in CY09 to payoff in FY11: Front-loaded investments in sales
and marketing (sales and marketing headcount up by 50% in 2 years), new
geographies (local country heads for France & Germany), verticals
(government practice started) and employees (sufficient bench strength,
ahead of competition on salary hike front and 19k offers already made for
FY11) will position Infosys to deliver a superlative FY11.

* Retain BUY; Infosys is our top pick: We remain positive on the Indian IT
sector and prefer large caps (Infosys, TCS and Wipro all rated BUY) over mid
caps. Our price target of Rs3,200 is based on 21x FY12 EPS.