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Infosys Technologies – End of an Era ?

April 17, 2011

Engineering Wage Arbitrage / Trading Company – Infosys Technologies was in a Chaos on Friday as two Sr. Members of the board quit with its CEO announcing dismal Q4 performance and a tepid guidance for the next fiscal. Infosys has lagged peers in the recent past – leading to a relative de-rating. 4Q results are weak.

4Q was weak on most counts – volumes declined ~1.4% qoq and the company missed the lower end of revenue guidance in constant currency terms. Management attributed this to seasonality but it looks weaker than in the past few years. The weakness was across the board although some segments like Insurance and Telecom were more impacted.

Infosys guided FY12 EPS of Rs126-128 vs. the Street’s expectation of Rs135-140 (c.8% lower). We believe the market’s reaction was more to the low EPS guidance rather than the 4Q miss. EPS expectations of all the brokerages are in-line with the management guidance. 12 Months Price Target for the Stock is in the range of Rs 3,300 to Rs 3,500. Update: ENAM has put a target of Rs 2,800.

We caution investors against buying the stock just because it might be cheaper than its five-year (full-cycle) median valuations. After losing leadership in the telecom vertical, the company will likely concede leadership in North American revenues to Cognizant. Infosys has guided for a 300 bps decline in OPM for FY2012E; this has spooked the market. Finally, the
company has to get its act together on operations— completion of management and organization structure changes will help channelize energies in the right direction.

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