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Infosys downgraded to Underweight – Morgan Stanley

August 27, 2009

Since the Ground realities in the IT sector warrant caution, Morgan Stanley has downgraded Infosys Technologies from Equal-weight to Underweight.

Valuations for Infosys appear rich and near-term risk reward is turning unfavorable. Lack of visibility on ramp-ups from existing clients remains the single biggest headache for managements across IT companies.

Linear extrapolation of margin expectations appears to be a key risk, in our view. MS estimates that wage cost savings have come primarily from attrition and shifting of employees to offshore. Channel checks indicate that the pace of offshore shift has slowed down considerably.

Even though the stock is already trading above Rs 1700 target price, in the near-term incremental upside should be sold rather than bought in our view. Infosys has been our preferred pick amongst the large caps in 1H09. Going forward, TCS/Wipro could narrow their trading discount to Infosys.

Infosys is expcted to report an EPS of Rs 104 and Rs 113 for FY 19 and FY 11 respectively. Appears overvalued to the growth it has on its hands.

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