India Equity Research

IT

Company Update

INFOSYS TECHNOLOGIES Infosys 3.0: Minor restructuring Infosys Technologies (Infosys) outlined its new initiative 'Infosys 3.0: Building Tomorrow's Enterprise. The company has effected minor changes to its organization structure by bringing in the P&L responsibility of business in emerging geographies under vertical heads. In our view, the street was expecting Infosys 3.0 to be a substantial initiative enabling it to accelerate growth and defend, if not improve, margins. This restructuring essentially expands the portfolio of business unit heads, which is unusual, as large companies typically restructure businesses to create smaller units for agility.
EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market HOLD Performer Low Equalweight Reuters: INFY.BO Bloomberg: INFO IN

May 2, 2011

What is Infosys 3.0?

Infosys has created four broad verticals and three broad service categories for better account management and servicing. To propel its non-linear initiatives it has identified seven broad themes to build products, create platforms & frameworks, and develop solutions. It has created four broad verticals: (a) Banking, financial services, insurance and healthcare headed by Mr. Ashok Vemuri (also Head of North America) (b) Manufacturing headed by Mr. B G Srinivas (also Head of Europe) (c) Energy, utilities, communication and services headed by Mr. Prasad Thrikutam and (d) Retail, CPG, logistics and life sciences headed by Mr. Pravin Rao. Infosys is also grouping its services practice under three broad categories: (1) Transformation services: Consulting, systems integration and enterprise solutions (2) Operations services: ADM, IMS, BPO and independent validation and testing services (3) Innovation: Products, platforms and all other nonlinear businesses. Each of these categories will have heads who along with vertical heads will enable client management and servicing.

Note: Please refer last page of the report for rating explanation

MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 2,923 3,499 / 2,485 571.2 1,678 /37,846 1,153.7

Avg. Daily Vol. BSE/NSE (000): SHARE HOLDING PATTERN (%) Promoters* MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) : : : : :

16.0 9.0 36.1 38.9 NIL

Outlook and valuations: Conservatism continues; maintain HOLD

The street was expecting Infosys to combat its slowing growth and dipping margins with some substantial change in strategy. But, we believe, the changes announced are minor. The company continues to work on its philosophy of profitable growth, which in the current competitive environment would be challenging. The silver lining in Infosys 3.0 is the creation of Innovations practice that will enable it to take up non-linear initiatives. We believe, consensus forecasts on revenue and margin are still optimistic and hence earnings are at risk. At 21.1x FY12E earnings, we maintain HOLD/Sector Performer. Financials Year to March Net revenue Rev. growth (%) EBITDA Net profit Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted PE (x) EV/EBITDA (x) ROAE (%) FY10 227,420 4.8 78,610 62,180 571 108.9 4.3 26.8 19.4 30.1 FY11 275,010 20.9 89,560 68,230 571 119.4 9.7 24.5 16.8 27.1 FY12E 329,846 19.9 101,863 79,074 571 138.4 15.9 21.1 13.7 26.6 (INR mn) FY13E 393,460 19.3 117,702 93,431 571 163.5 18.2 17.9 11.3 26.7
1 month 3 months 12 months

Stock (8.4) (8.3) 9.3

Nifty EW Technology Index 0.2 4.3 9.4 (1.8) (2.6) 26.6

Ganesh Duvvuri +91 22 4040 7586 ganesh.duvvuri@edelcap.com Kunal Sangoi +91 22 6623 3370 kunal.sangoi@edelcap.com Omkar Hadkar +91 22 6620 3147 omkar.hadkar@edelcap.com

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Infosys 3.0
Infosys has re-grouped its verticals into four broad categories and services practice into three broad categories. Fig. 1: Structure of the re-grouped Verticals and services practice

Infosys3.0 BuildingTomorrow'sEnterprise
BFSI and Healthcare (headed by Ashok Vemuri) Manufacturing (headed by B G Srinivas) Energy & utilities, communication and services (headed by Prasad Thrikutam) Retail, CPG, logistics and lifesciences (headed by Pravin Rao)

Verticals

Business Operations Application development & maintenance, Infrastructure management services, BPO and independent validation and testing services

Services

Business Transformation Business consulting, Systems integration, Enterprise solutions and some application development

Business Innovation (headed by Mr. Subhash Dhar) Products, platforms and all other non-linear businesses

Themes

Digital consumer

New commerce

Healthcare economy

Sustainable tomorrow

Smarter organisations

Emerging economies

Pervasive computing

Source: Company; Edelweiss research

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Infosys Technologies
To pursue innovations actively
Infosys has re-grouped its services practice into three broad categories, of which one is Innovation. It has identified seven broad areas to innovate (i.e., build products, platforms, frameworks and create solutions) Fig 2: Innovation to be focused in Seven areas

Digital consumer

Driving the emergence of self-service ecosystems, unprecedented personalisation and solution co-creation with customers and partners Driving growth by leveraging mobility, micro-demand and inclusive commerce Changing dynamics of healthcare making it more affordable, preventive and patient-centric

New commerce Healthcare economy

Sustainable tomorrow Smarter organisations

Increasing relevance of resource intensity, social contracts and green innovations

Increasing focus on simplification and collaboration to continually learn and adapt

Emerging economies Pervasive computing

Growth engine, innovation hub and smart sourcing destination for global enterprise Sensor networks, intelligent enterprises and cloud-based solutions presenting new revenue enhancement and cost reduction opportunities
Source: Company; Edelweiss research

Mr. Subhash Dhar, currently heading sales & marketing, will head this initiative. This group will pursue Infosys non-linear initiative in a focused manner. We believe this focus will lead to further innovation within the organization. What remains to be seen is the quantum of investment allocated by the company to this group and the freedom to allocate resources. Mr. Kris Gopalakrishnan, currently CEO and nominated co-Chairman (effective August 21, 2011), stated on the analyst call that Infosys will continue with its philosophy of pursuing better-than-industry growth and premium margins. This seems to indicate that the companys focus on metrics like utilisation and cost will continue. Mr. Shibulal, currently COO and nominated CEO (effective August 21, 2011), stated that Infosys will pursue inorganic opportunities to scale up its non-linear business. Thus, we believe, overall, the initiative by the company to create a separate Innovations practice augurs well.

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Company Description
Infosys is the second-largest IT services company in India providing consulting and IT services to clients globally. It is also among the fastest growing IT services organization in the world and a leader in the offshore services space with a pioneer in Global delivery model. Infosys provides business consulting, application development and maintenance and engineering services to 590 active clients spread across Banking, Financial Services, Insurance, Retail, Manufacturing, and Utilities verticals and 50 countries. The company has also its own proprietary core banking software - Finacle used by some of the leading banks in India, Middle East, Africa and Europe. Infosys total employee force stands at 130,820 and the companys TTM revenues stood at INR 275.0 bn (USD 6.0 bn).

Investment Theme
Infosys is known for its excellent project execution skills and is one of best sales and marketing engine, which makes it the most preferred tier 1 vendor. With rapidly increasing numbers of service lines and domain capabilities, Infosys has readied itself for multiple possible points of initiating and growing client engagements most profitably. The recent push has been to delink the revenue and headcount linkage and moving away from revenues to over 33% in next 5-7 years. The company has also demonstrated its ability to engage with larger client organizations and winning increasing proportion of their wallet share with focused farming approach. Infosys growth over FY02-08 clearly reflects its abilities to benefit from the improving macro environment, however we believe a greater risk taking approach will be required to increasing market share.

Key Risks
Key risks to our investment theme include IT spending picks up further and Infosys sheds its conservatism and bids aggressively for large deals.

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Financial Statements
Income statement Year to March Net revenue Cost of revenues Gross profit Total SG&A expenses S&M expenses G&A expenses EBITDA Depreciation & Amortization EBIT Other income Profit before tax Provision for tax Core profit Extraordinary income/ (loss) Profit after tax Profit after minority interest Basic shares outstanding (mn) Basic EPS (INR) Diluted equity shares (mn) Diluted EPS (INR) CEPS (INR) Dividend per share (INR) Dividend (%) Dividend payout (%) Common size metrics - as % of net Year to March Cost of revenues Gross margin G&A expenses S&M expenses SG&A expenses EBITDA margins EBIT margins Net profit margins Growth ratios (%) Year to March Revenues EBITDA EBIT PBT Net profit EPS FY09 30.0 37.4 38.7 29.2 28.5 28.5 FY10 4.8 9.3 8.1 14.4 3.8 4.3 FY11 20.9 13.9 16.5 17.9 9.7 9.7 FY12E 19.9 13.7 13.1 15.1 15.9 15.9 FY13E 19.3 15.5 14.7 14.7 18.2 18.2 FY09 54.2 45.8 5.1 7.5 12.6 33.2 29.7 27.6 FY10 53.1 46.9 5.2 7.1 12.4 34.6 30.6 27.3 FY11 54.8 45.2 5.5 7.2 12.7 32.6 29.5 24.8 FY12E 57.1 42.9 5.5 6.5 12.0 30.9 27.8 24.0 FY13E 58.5 41.5 7.6 4.0 11.6 29.9 26.7 23.7 FY09 216,930 117,650 99,280 27,330 11,040 16,290 71,950 7,610 64,340 9,140 69,070 9,190 59,880 59,880 59,880 572 104.6 573 104.4 118.0 23.5 469.9 26.3 FY10 227,420 120,710 106,710 28,100 11,840 16,260 78,610 9,050 69,560 9,040 78,990 16,810 62,180 480 62,660 62,660 570 109.0 571 108.9 126.0 25.1 502.7 26.7 FY11 275,010 150,620 124,390 34,830 15,120 19,710 89,560 8,540 81,020 11,740 93,130 24,900 68,230 68,230 68,230 571 119.5 571 119.4 134.4 37.6 750.0 36.7 FY12E 329,846 188,325 141,522 39,659 18,189 21,470 101,863 10,225 91,638 15,547 107,184 28,110 79,074 79,074 79,074 571 138.4 571 138.4 156.3 45.0 900.0 37.9 (INR mn) FY13E 393,460 230,244 163,216 45,514 29,776 15,738 117,702 12,591 105,111 17,825 122,936 29,505 93,431 93,431 93,431 571 163.6 571 163.5 185.6 55.0 1,100.0 39.2

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Balance sheet As on 31st March Equity capital Share premium account Reserves & surplus Shareholders funds Sources of funds Gross block Accumulated depreciation Net block Capital work in progress Deferred tax asset Goodwill Investments Sundry debtors Cash and equivalents Loans and advances Total current assets Sundry creditors and others Provisions Total current liabilities & provisions Net current assets Uses of funds Book value per share (INR) Free cash flow Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metrics Year to March Cash flow from operations Cash for working capital Operating cash flow Net purchase of fixed assets Net purchase of investments Others in Cash Flow Metrics Investing cash flow Dividends Proceeds from issue of equity Financing cash flow Exchange rate differences Net cash flow FY09 57,850 (4,600) 53,250 (13,270) 680 10,560 (2,130) (24,940) 640 (24,300) 760.0 27,580 FY10 62,440 (400) 62,040 (6,200) (38,710) 8,710 (36,200) (15,740) 890 (14,850) 190.0 11,180 FY11 51,538 (1,560) 49,978 (6,798) 37,120 11,650 41,972 (25,013) 550 (24,463) 67,487 FY12E 73,752 62,601 136,354 (18,000) 15,547 (2,453) (29,973) 16 (29,957) 103,943 FY13E 88,197 6,895 95,092 (11,500) 17,825 6,325 (36,634) (36,634) 64,783 FY09 59,880 7,610 50 (2,270) 65,270 12,020 53,250 10,070 43,180 FY10 62,660 9,050 670 (8,870) 63,510 1,470 62,040 2,510 59,530 FY11 68,230 8,540 (25,232) 51,538 1,560 49,978 7,660 42,318 FY12E 79,074 10,225 (15,547) 73,752 (62,601) 136,354 18,000 118,354 FY09 2,860 29,250 150,430 182,540 182,540 64,040 24,160 39,880 6,770 1,260 6,890 36,720 96,950 32,790 166,460 20,040 18,680 38,720 127,740 182,540 318.3 FY10 2,860 30,270 197,360 230,490 230,490 69,230 28,930 40,300 4,090 2,000 9,160 37,120 34,940 105,560 41,870 182,370 23,430 21,120 44,550 137,820 230,490 403.6 FY11 2,860 30,820 239,350 273,030 273,030 80,980 32,540 48,440 15,582 8,298 58,960 166,890 11,270 237,120 34,130 2,280 36,410 200,710 273,030 477.9 FY12E 2,856 30,840 288,451 322,147 322,147 92,980 42,765 50,215 6,000 15,582 8,298 55,369 270,833 13,524 339,726 39,591 58,083 97,674 242,052 322,147 563.8 (INR mn) FY13E 2,856 30,840 345,248 378,944 378,944 104,980 55,356 49,624 5,500 15,582 8,298 64,678 335,617 14,876 415,171 49,093 66,138 115,231 299,940 378,944 663.2 (INR mn) FY13E 93,431 12,591 (17,825) 88,197 (6,895) 95,092 11,500 83,592

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Profitability & efficiency ratios Year to March ROAE (%) ROACE (%) Debtors days Payable days Cash conversion cycle (days) Current ratio Operating ratios Year to March Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY09 104.4 28.5 118.0 28.0 9.2 7.3 21.9 20.1 0.8 FY10 108.9 4.3 126.0 26.8 7.2 6.8 19.4 17.0 0.9 FY11 119.4 9.7 134.4 24.5 6.1 5.5 16.8 14.7 1.3 FY12E 138.4 15.9 156.3 21.1 5.2 4.2 13.7 11.9 1.5 FY13E 163.5 18.2 185.6 17.9 4.4 3.4 11.3 1.9 FY09 1.4 6.4 1.4 FY10 1.1 5.7 1.1 FY11 1.1 6.2 1.1 FY12E 1.1 6.7 1.1 FY13E 1.1 7.9 1.1 FY09 37.4 40.2 59 33 26 4.3 FY10 30.1 37.0 58 35 23 4.1 FY11 27.1 34.7 62 38 24 6.5 FY12E 26.6 30.8 63 41 22 3.5 FY13E 26.7 30.0 56 41 15 3.6

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RATING & INTERPRETATION

Company ECLERX SERVICES Hexaware Technologies Infosys Technologies Mphasis Rolta India Wipro

Absolute reco BUY BUY HOLD REDUCE BUY HOLD

Relative reco SO SO SP SU SO SU

Relative risk M M L M H L

Company HCL Technologies Info Edge Infotech Enterprises Patni Computer Systems Tata Consultancy Services

Absolute reco BUY REDUCE BUY HOLD BUY

Relative reco SO SU SO SU SO

Relative Risk H M H M L

ABSOLUTE RATING
Ratings Buy Hold Reduce Expected absolute returns over 12 months More than 15% Between 15% and - 5% Less than -5%

RELATIVE RETURNS RATING

Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return

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Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai 400 021. Board: (91-22) 2286 4400, Email: research@edelcap.com
Vikas Khemani Nischal Maheshwari Head Head Institutional Equities Research vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +91 22 2286 4206 +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): IT

ECLERX SERVICES, HCL Technologies, Hexaware Technologies, Infosys Technologies, Info Edge, Infotech Enterprises, Mphasis, Patni Computer Systems, Rolta India, Tata Consultancy Services, Wipro

Infosys Technologies

EW Indices
1,600

3,500 3,125 (INR) 2,750 2,375 2,000 Hold Hold

Hold Hold Hold Hold

Hold Hold Hold

1,300 1,000 700 400

May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11

29-Apr-10

29-Oct-10 Infosys Technologies Ltd. EW Technology Index Nifty

29-Apr-11

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * 3 stocks under review > 50bn Market Cap (INR) 111 118 Hold 51 Reduce 17 Total 189 < 10bn 17

Recent Research Date 29-Apr-11 Company Info Edge Title Reinvestments need to take centre stage ; Result Update Standing tall among peer group; Result Update Execution of charted strategy key to high growth; Result Update Price (INR) Recos 732 Reduce

Between 10bn and 50 bn 61

28-Apr-11 27-Apr-11

Hexaware Tech. Wipro

70 459

Buy Hold

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