High U.S. Exposure for Infosys

Infosys Technologies, Ltd. (INFY - Analyst Report) continues to strengthen strategic alliances and reorganize businesses in order to counter the effects of a strong rupee. The company was able to maintain stable operating margins in the fourth quarter despite a high attrition rate, while benefiting from a slight depreciation of the rupee.

We are concerned that there will be a supply problem in hiring new and experienced consultants as more and more business move into India, and there are only so many skilled workers to hire. The higher attrition rates, coupled with moderate revenue growth have us concerned about FY09, although the company continues to manage its bottom line well.

One high-risk area for Infosys remains its over-exposure to the slowing U.S. market, which accounts 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 - Snapshot Report) will enable the company to capture hitherto unaddressed market opportunities going forward.

The company's shares are presently trading at roughly 18.5x our fiscal year 2009 EPADS estimate of $2.32 and at 16.5x our FY10 EPADS estimate of $2.60. The company has forecasted FY09 revenues at this point and accordingly we have adjusted our model to reflect a year-over-year revenue growth rate of 20.8% for FY09.

We continue to believe that INFY may trade at a lower P/E than its historical average and have set a price target of $45.00, or between 19.3x and 19.5x our 2009 estimate over the next six months. We continue to rate INFY a Hold and are concerned about the short-term pressures the company is facing.

Udayan Mukherjee contributed to the report.

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