Buy Infosys; target of Rs 2440: Citigroup

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Buy Infosys; target of Rs 2440: Citigroup

Citigroup Research is bullish on Infosys Technologies and has recommended buy rating on the stock with a target of Rs 2440. Research firm is positive on the stock from a fundamental 12-month view.

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Citigroup Research is bullish on Infosys Technologies and has recommended buy rating on the stock with a target of Rs 2440. Research firm is positive on the stock from a fundamental 12-month view.

Citigroup Research report on Infosys Technologies:

Company description 

Infosys is the second largest IT services company in India with more than 72,000 professionals. It is also among the fastest growing IT services organization in the world, and is a leader in the offshore services space. Infosys provides business consulting, application development and maintenance and  engineering services to about 500 active clients across verticals such as  Banking, Financial Services, Insurance, Retail, Manufacturing, and Utilities in  the Americas, Europe and Asia Pacific. Infosys sells a core banking application,  Finacle, which is used by leading banks in India, the Middle East, Africa and  Europe. Its subsidiary, Infosys BPO (formerly Progeon), which employs more than 11,000 people, is a provider of BPO services. It launched a subsidiary in April 2004, Infosys Consulting, which provides high-end IT consulting services.

Investment thesis 

We rate Infosys as Buy/Low Risk (1L). We are positive on the stock from a fundamental 12-month view. Offshore IT outsourcing has now become a mainstream option, and we think scale and scalability, along with an ability to move up the value chain, are key criteria for successful offshore IT vendors. In  this respect, Infosys appears well positioned and continues to gain ground given  its strong branding and industry-leading sales force. Infosys should see above industry  average volume growth along with modest pricing improvement. We expect Infosys to deliver revenue CAGR of 24.5% and EPS CAGR of 19.1% for  FY07-10. Unlike many other high-growth firms in other industries, Infosys continues to generate solid FCF, and its RoE of 40%+ continues to be well above its cost of capital. 

Valuation 

Our target price of Rs2,440 is based on 25x FY09E EPS. This is close to the midpoint of the last one-year trading band of 20-28x 1-year forward earnings and factors in some deceleration in growth. We are now forecasting 19% earnings growth (on a high base of FY07) with some upside potential from  pricing improvement and/or rupee depreciation. This is also supported by comparing it with global peers and the broader Indian market. The 25x multiple was also derived from a P/E band analysis of Infosys' trading pattern. During slowdowns in tech and offshore IT services, Infosys has traded at an average  one-year rolling P/E of 25.1x with a low of 13x. Our estimates continue to assume a certain P/E premium to the market; this is justified, in our view, given the strong FCF, ROIC and growth rates for Infosys vs. the overall market. We believe P/E remains the most appropriate valuation measure given Infosys'  profitable record and high earnings visibility. 

Risks 

We rate Infosys shares as Low Risk, which is consistent with our quantitative risk-rating system that tracks historical share price volatility. The key downside risks to the shares reaching our target price include: (1) any significant appreciation of the rupee against the US dollar/euro/pound; (2) pressure on billing rates (as Infosys continues to enjoy a 10-15% premium in its billing rates); (3) a sharp slowdown in the US economy; and (4) limited H1B visa quotas.