5 INFOSYS TECHNOLOGIES LTD

RESEARCH
EQUITY RESEARCH January 16, 2009

RESULTS REVIEW Infosys Technologies Limited Hold

Well placed to weather near-term headwinds
Share Data
Infosys’s Q3’09 result was in line with expectations, despite pricing pressure
Market Cap Rs. 726.2 bn
Price 1,268.25 and slow volume growth. Revenues grew 6.8% qoq to Rs. 57.9 bn, helped by
BSE Sensex 9,323.59 the depreciation of the rupee vis-à-vis the dollar. Though revenues in dollar
Reuters INFY.BO terms declined 3.7% qoq, effective cost management and rupee depreciation
Bloomberg INFO IN boosted the EBITDA margin by 199 bps qoq to 35.1%.
Avg. Volume (52 Week) 0.4 mn Volume growth to moderate: With corporate entities worldwide curbing
52-Week High/Low Rs. 2,017 / 1,040 their IT spends, we expect new deals and ramp-ups to slow down across the
Shares Outstanding 572.6 mn
Services vertical. However, the Company’s strong brand equity and
corporate governance standards may attract jittery clients of Satyam and
Valuation Ratios (Consolidated)
other small/mid-sized IT services companies to Infosys. This may lessen the
Year to 31 March 2009E 2010E
adverse impact of the global slowdown.
EPS (Rs.) 102.7 85.9
EPS Growth (%) 26.4% -16.4%
Pricing pressure is unavoidable: We expect the billing rate to decrease by
PER (x) 12.3x 14.8x 2–4% in the next 3–4 quarters, considering that large clients from the
EV/ Sales (x) 3.0x 3.1x developed economies may demand price cuts. However, Infosys’s strategy
EV/ EBITDA (x) 9.2x 12.4x
to focus on fixed-priced projects and value-based pricing is likely to ease

Shareholding Pattern (%)

billing pressure in the medium term.
Promoters 17 Focus on operational efficiency: Infosys is steadily improving its offshore
FIIs 33 mix, which should help counter the pressure on the EBITDA margin at
Institutions 9
constant currency (FY09 at 32% to FY10 at 31%). Moreover, we expect
Public & Others 42
wage inflation to fall in FY10 as the Company may reduce its offshore
Relative Performance bonuses.

2,500 Gaining footprints in high-end services: Infosys is gaining traction in high-

2,000 margin services such as Consulting, System Integration, and Infrastructure
1,500 Management. As a result, it is better placed than its competitors to provide
1,000
end-to-end solutions. This may further help Infosys to win large and
500
0
transformational deals in the medium-to-long term.
Key Figures (Consolidated)
Jan-08
Feb-08

Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Mar-08

Quarterly Data Q3'08 Q2'09 Q3'09 YoY% QoQ% 9M'08 9M'09 YoY%
(Figures in Rs. mn, except per share data)
Net Sales 42,710 54,180 57,860 35.5% 6.8% 121,500 160,580 32.2%
INFOSYS Rebased BSE Index
EBITDA 13,920 17,940 20,310 45.9% 13.2% 37,600 53,040 41.1%
Net Profit 12,310 14,320 16,410 33.3% 14.6% 34,100 43,750 28.3%
Margins(%)
EBITDA 32.6% 33.1% 35.1% 30.9% 33.0%
NPM 28.8% 26.4% 28.4% 28.1% 27.2%
Per Share Data (Rs.)
EPS 21.5 25.0 28.6 33.3% 14.6% 59.5 76.3 28.3%
Please see the end of the report for disclaimer and disclosures. -1-
 5 INFOSYS TECHNOLOGIES LTD
EQUITY RESEARCH
Revenue from Manufacturing
declines after five consecutive
quarters of double-digit growth
New client addition at lowest levels
in the last 11 quarters
Please see the end of the report for disclaimer and disclosures.
RESEARCH
January 16, 2009
Limited near-term appreciation: Our DCF valuation suggest a fair price of
Rs.1,325, which provides limited upside over current levels. Although the
stock is trading at a historically low P/E of 13x, we believe that the upside is
capped on account of the likely negative news flow. However, Infosys’s
strong fundamentals and competitive position should help restrict the
downside risks. Considering all the factors and our valuation, we recommend
a Hold rating on the stock.
Result Highlights
BFSI and Retail spring a surprise
BFSI and Retail, both struggling verticals, saw a growth of approximately 1%
qoq each, along with improved revenue contribution together by 2%.
Meanwhile, the Energy & Utilities vertical grew by 8.6% qoq.
Manufacturing & Telecom decline
Revenues from the Manufacturing vertical fell 6.1% qoq after witnessing
double-digit growth for the last five quarters. In addition, the Telecom vertical
witnessed a sharp decline of 15.4% qoq, largely due to cross-currency
movements.
SI and IMS in green
Infosys’s focus on high-end services yielded good results during Q3’09.
While System Integration (SI)’s revenue contribution improved 50 bps qoq
with a sequential growth of 10.1%, Infrastructure Management Services
(IMS) continued to improve steadily and registered a growth of 6.1% qoq.
However, Consulting Services & Package Implementation (CSPI) went down
by 4.5% qoq.
Client addition slowing down
The Company added only 30 new clients during the quarter, the lowest in the
last 11 quarters, due to the challenging global macroeconomic environment.
However, Infosys won four large deals (USD 50 mn+) during the quarter and
now has a pipeline of around 10 large deals.
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 5 INFOSYS TECHNOLOGIES LTD
RESEARCH
EQUITY RESEARCH January 16, 2009

Improvement in operational efficiency

During the quarter, the Company recorded an improvement across all
operational parameters, such as the offshore mix, the fixed-price projects
mix, and the attrition rate. However, the utilisation level (including that of the
trainees) went down by 90 bps qoq to 68.5%. We expect the utilisation level
to remain low at 67–68% for the next 4–5 quarters, considering the slowing
deals inflow and ramp-ups.
5 7 .0 4 0 .0

C o n t rib u t io n ( % ) 5 4 .0 3 5 .0

P ro je c t s ( % )
F ix e d p ric e
O f f s h o re

5 1 .0 3 0 .0

4 8 .0 2 5 .0

4 5 .0 2 0 .0
Q 1 '0 7
Q 2 '0 7
Q 3 '0 7
Q 4 '0 7
Q 1 '0 8
Q 2 '0 8
Q 3 '0 8
Q 4 '0 8
Q 1 '0 9
Q 2 '0 9
Q 3 '0 9
O ff s h o r e C o n t r i b u t i o n F ix e d p r i c e P r o je c ts
Key Events

• Infosys bagged a five-year, multi-million dollar deal from AstraZeneca. It

will provide end-to-end application maintenance services to AstraZeneca
in areas such as manufacturing, supply chain, finance, human resources,
and other corporate functions.
• Raiffeisen International selected Infosys’s Finacle to standardise and
consolidate their technology platform.
• Mercator, a Dubai-based business technology provider, has joined hands
with Infosys to establish an offshore development centre (ODC).

Downside Risks

• A longer-than-expected recession in the developed economies

• A more-than-expected appreciation of the rupee vis-à-vis the dollar
• A greater-than-anticipated wage inflation

Upside Risks

• An earlier-than-expected economic recovery in the developed economies

• Further depreciation of the rupee vis-à-vis the dollar
Please see the end of the report for disclaimer and disclosures. -3-
 5 INFOSYS TECHNOLOGIES LTD
RESEARCH
EQUITY RESEARCH January 16, 2009

• A less-than-anticipated wage inflation

Company Guidance and Our View

For FY09, Infosys has again reduced its revenue guidance approximately by
2% to 11.8%–12.8% (USD 4.67–4.71 bn) in USD terms. We expect revenue
growth to remain around 12.1% for FY09 as deal ramp-ups decelerate. In
INR terms, Infosys has given an EPS guidance of Rs. 102.9 for FY09.
However, we do not expect the Company to meet this target due to sustained
pricing pressure.

Outlook

We expect a weak operating performance from Infosys in the near term

because of the recession in the developed economies. Furthermore, we
expect billing to decrease by 2–4% per quarter in the next 3–4 quarters. Also,
fewer client additions and slower ramp-ups are expected to lead to revenue
de-growth of 4.6% in FY10 in INR terms. However, we believe that Infosys’s
strong brand equity, end-to-end delivery capabilities, and corporate
governance standards will ensure growth in the medium-to-long term.

Valuation

Our DCF valuation suggests a fair value of Rs. 1,325, assuming an 8% Rf, a
13.36% WACC, and a 5% terminal growth. While the stock has limited
downside risks, the near-term upside appears limited due to the expected
weakness in IT spending and the continuing recession in the developed
economies. Hence, we downgrade our rating on the stock to Hold.
Key Figures (Consolidated)
Year to March FY06 FY07 FY08 FY09E FY10E FY11E CAGR (%)
(Figures in Rs. mn, except per share data) (FY08-11E)

Net Sales 95,210 138,930 166,920 215,343 205,524 221,976 10.0%

EBITDA 30,910 43,910 52,380 69,511 51,549 51,341 -0.7%
Net Profit 24,580 38,500 46,590 58,904 49,235 54,223 5.2%

Margins(%)
EBITDA 32.5% 31.6% 31.4% 32.3% 25.1% 23.1%
NPM 25.8% 27.7% 27.9% 27.4% 24.0% 24.4%

Per Share Data (Rs.)

EPS 43.8 67.6 81.3 102.7 85.9 94.6 5.2%
PER (x) 68.1x 29.8x 17.6x 12.3x 14.8x 13.4x
Please see the end of the report for disclaimer and disclosures. -4-
 5 INFOSYS TECHNOLOGIES LTD
RESEARCH
EQUITY RESEARCH January 16, 2009

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