Edelweiss Research has come out with pre earnings report on Infosys Technologies. It has recommended buy rating on the stock.

Expected numbers

Edelweiss expects Infosys to close Q4FY07 with revenues of INR 38.7 billion (Q-o-Q growth of 5.9%) and net profit of INR 10.6 billion (Q-o-Q growth of 7.8%). EPS estimates stand at INR 18.9 per share. The company has guided INR 37.9–38.0 bn of revenues and EPS of INR 17.9 for the current quarter.

Edelweiss report on Infosys Technologies

Guidance to be strong, though affected due to rupee’s appreciation

Concerns have been hovering around Infosys’ guidance leading to recent underperformance of the stock. The rupee has appreciated sharply against the USD in the past two weeks of the quarter, which will impact FY08 guidance. However, we expect the company to guide 26-28% growth in revenues and 24-26% EPS growth for FY08. We also note that over the past three years the guidance given in April has always been revised upwards as the fiscal progressed. Our discussions with the company’s business heads also reinforce the strong growth outlook with IT budgets expected to go up in the 3-6% range.

Changing revenue mix leading to improved per capita revenue

With competition becoming more cost efficient and pressure from rising salary costs, Infosys has been slowly altering its revenues mix. The contribution from high margin service businesses such as package implementation, products, consulting are gradually increasing, providing a cushion to salary inflation and increased per capita revenue.

Infosys BPO expanding

Infosys BPO has entered into an alliance with US-based HVS International to offer outsourcing solutions in the hospitality industry and has also partnered Bottomline Technologies for its in-house invoice automation. Infosys BPO has a strong portfolio of horizontal process outsourcing capabilities and these are customized for specific industry verticals to provide domain-specific and company-specific solutions. With this alliance and partnership the company will be able to reach a wider audience and augment its capabilities in this hospitality industry.

Valuations

At a CMP of INR 1,921, the stock currently trades at a P/E of 22.1x and 17.1x and EV/EBITDA of 16.0x and 11.1x for our FY08E and FY09E, respectively. We retain our buy recommendation.

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