We continue to rate Infosys Technologies, Ltd. (INFY) a Hold. The company reported higher than expected revenues and earnings for 1Q:FY09. It continues to strengthen strategic alliances and reorganize businesses in order to counter the effects of business cycles.
The company reported lower operating margins in the first quarter due to a high attrition rate, while benefiting from a 5.6% depreciation of the rupee. These effects were offset by lower utilization rates and effects of salary increase and visa costs. We are projecting a lower 2009 revenue growth rate of 21.0% in dollar terms while wage increase, currency and attrition remain our major concerns.
One high-risk area for Infosys remains its over-exposure to the slowing U.S. market, which accounts for more than 60% of revenues and therefore it is more prone to adverse effects of currency. However, the recent reorganization of businesses with a dedicated India focus as well as enhancement of relationship with Microsoft (MSFT) will enable the company to capture hitherto unaddressed market opportunities going forward.
The company's shares are presently trading at roughly 15.8x our fiscal year 2009 EPADS estimate of $2.35 and at 14.3x our FY10 EPADS estimate of $2.60. We believe the company may be on target with a slew of large-scale and longer duration BPO deals even as competition intensifies for larger deals and growth on a larger scale becomes more difficult.
We continue to believe that INFY may trade at a lower P/E than its historical average and have set a price target of $39.00, or between 16.4x and 16.7x our 2009 estimate over the next six months.
Udayan Mukherjee contributed to the report.
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