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Infosys EPS Estimates and Analysis – Edelweiss

October 2, 2007

Indian IT major, Infosys Technologies which mainly banked on large maintenance and lower end IT work is now going through mid life crisis. Founding member, Naryana Murthy who takes much credit is responsible for the current mess Infosys is in today. Had he been a visionary, he should have stepped down long before to pave wway for other Infoscions who have different vision apart from being mere consulting company. Unfortunately all those guys parted ways with Infosys to successfully build tech companies – OnMobile is one of them.

Scenario 1: Indian Rupee at 39 for FY09 and 3-4% appreciation from current levels.

In this scenario, our EPS estimate for FY2010 is INR 110 (considering the higher tax rate in 2010) and EPS is expected to grow at a CAGR of 25% between FY10-12.

1a. Assuming a historically traded PEG of 1, the stock price in 18 months should be INR 2,750 (25x FY10 EPS, upside of 44%).
1b. Assuming a lower PEG of 0.8 to factor in lower ROEs (31% in FY10 from 40%+ in FY05-07) and risk of further depreciation, the stock price in 18 months should be INR 2,197 (upside of 15%, 20x FY10 EPS).

Scenario 2: Indian Rupee at 38 for FY09 and 3-4% appreciation p.a. from there

In this scenario, we think FY10 EPS will be INR 104 (considering the higher tax rate) and EPS will grow at a CAGR of 25% between FY10-12.

2a. Assuming historically traded PEG of 1, the stock price in 18 months should be INR 2,599 (upside of 36%).
2b. Assuming a lower PEG of 0.8 to factor in lower ROEs (29% in FY10 from 40%+ in FY05-07) and risk of further depreciation, the stock price in 18 months should be INR 2,079 (upside of 9%, 20x FY10 EPS).

Assigning a 33% probability to scenario 1b and 2b and 17% to 1a and 2a (of course there can be more optimistic and pessimistic scenarios). 18 month target price comes to INR 2,314 (annualized return would be 14.5%). Therefore, it should be rated accumulate from the current levels. It becomes a buy only below INR 1,800

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