Infosys Technology

The macro business environment has worsened further since the last commentary by Infosys Technologies’ (Infosys) management. In the recent interaction, the management has indicated higher than expected pricing pressure, project cancellations and considerable decline in the IT budgets of its clients. The worsening situation has been further aggravated by the banking and financial services clients, with large global players like the Bank of America, Citibank, American International Group (AIG) and the Royal Bank of Scotland (RBS) looking for further bailout packages. In addition, the possible nationalisation of banks and the anti-outsourcing rhetoric getting shriller put a question mark on the volume growth in the next fiscal.

On the positive side, the continued depreciation in the rupee has emerged as a significant tail wind for tech companies including Infosys. The rupee has depreciated by around 6.5% in the past one month alone and is likely to remain weak. Infosys, with a relatively lower hedging exposure and marked to market (MTM) hedging policy, is likely to be among the key beneficiaries of the rupee depreciation.

In our view, if the rupee continues to remain weak and stablises at an average rate of Rs51-51.5 for FY2010, it would largely offset the impact of lower volume/pricing and cross currency head winds. As per our analysis, the impact on Infosys’ revenue growth would be limited to a decline of just 0.3%, as the gain of 9.7% resulting from the change in the exchange rate assumption to Rs51/USD for FY2010 would largely mitigate the loss of 4.7% and 5.3% arising from cross currency head winds and lower pricing/volume assumption (a 5% decline in pricing and a flattish growth in volume) respectively. Even on the earning level, the impact would be limited to 0.4% only.

Infosys is relatively better equipped to sail through the tough environment on account of its relatively premium pricing, operating leverage and better management quality. Buy /Accumulate on declines with a price target of Rs1,350.