􀀗 Investor focus shifting from volume and
pricing declines to margin resilience
􀀗 We find Infosys and TCS
operationally well placed as we
quantify the margin levers
􀀗 Range-bound shares and near-term
volatility to provide opportunities for
long-term bargain hunting, trading gains
We are strong believers in the operational flexibility of
Infosys and TCS and their ability to maintain margins within
a steady band. To test the impact of cost levers, we present
various scenarios and find limited further downside risk to
margins and estimates. We quantify the margin impact of
campus hiring in FY10, “plausible” variable pay cuts,
staffing mix and other levers in this report.
Worst-case scenario for margins. As we test these levers
on our operating model, we find that, even in a significantly
deteriorated demand environment (revenues down 14%),
every 1% fall in budgeted volumes would impact margins by
a modest 30bp.
We believe that the near-term negatives on the top line
are largely priced in. While near-term volatility in the
stocks cannot be ruled out, we find limited downside risk to
our estimates after our downward revision last month. In this
report we maintain all our forecasts and ratings and reiterate
our OW(V) on Infosys, valuing its operating strength and
strong track record. While long-term investors are likely to
spot value buying opportunities on dips, range-bound shares

Focus shifting to margins
􀀗 Investors’ focus appears to be shifting from volumes and
pricing to margin resilience and the ability to deliver continued
earnings growth
􀀗 We are strong believers in the operational flexibility of Infosys and
TCS. To test the impact of cost levers, we present various
scenarios and find limited further downside risk to margins

Despite softness in volumes and pricing, operating
margins have held up pretty well so far and have
in some cases even seen improvement. Investors’
focus, hitherto on the top line, is now shifting to
margin resilience as weak demand becomes
largely priced in. With the prolonged downturn,
investors are trying to single out sectors and
companies that are better positioned to maintain
margins and deliver positive earnings growth.
Closer look at the margin
levers
In the section “Margin resilience is for real” from
page 11, we have quantified the margin levers
(specifically for Infosys). Following are the excerpts:
􀀗 The margin impact of aggressive campus hiring
in FY10 (20,000 staff hired by Infosys) is likely
to be diluted by a more favourable employee
pyramid as the proportion of employees with
less than three years’ experience would improve
from 54% in FY09 to 58% in FY10. Without
the pyramid coming to the rescue, the lower
utilisation resulting from campus hiring would
have cut into margins by at least 280bp.
However, the employee pyramid shift provides
a cushion of 120bp and dilutes the margin
impact to a modest 170bp. Overall, a 1% shift in
the employee pyramid to the lower experience
band expands margins by c25bp.
􀀗 Variable pay has been talked about as the
major margin cushion in FY10. Infosys claims
of 30% of offshore salary as variable, providing
a cushion of c5% to margins. We believe that
management would find it difficult to eliminate
the 30% variable pay and could cut only c50%
(c2.6% margin cushion) of the total variable
components (CPI, VCPI, IPI) without
significant damaging employee morale and
productivity. Please refer to the “Margin
resilience is for real” section for further details.
􀀗 Staffing mix (shift from 1:3:5 to 1:3:6) could
also provide a one-time margin cushion of
c120bp to the offshore gross margins.
As we test these sensitivities on our operating model
(page 13), we find that, even in a significantly
deteriorated demand environment (revenues down
14%), every 1% fall in budgeted volumes would
impact margins by a modest 30bp.

目录

Focus shifting to margins 2
Closer look at the margin levers 2
3Q09 results: So far, so good? 5
Recent results show continuing, albeit slower, growth 5
EBIT margins benefited from INR weakness 6
Operational responses have been swift, but margins are
likely to face increasing pressures 6
Concerns on volumes and pricing are no longer central 7
Brunt of weakness yet to come 8
Global tech news flow suggests softness in the client
HW business 8
4Q CY09 tech spending growth driven by short-term
cost rationalisation 8
Staffing markets softening 10
Billing rates yet to witness noticeable correction 10
Margin resilience is for real 11
Investor focus shifting to margin resilience 11
How much can companies withstand margin weakness? 11
Favourable employee pyramid to dilute the margin
impact of aggressive campus hiring in FY10 13
Staffing mix could add to the cushion 15
Variable pay – how real is it? 15
Other cost levers 16
Where are we headed? 17
Further downside seems limited 17
Pockets of non-linear growth 17
Stocks range bound in near term but volatility ahead 18
Historical valuation has lost relevance 19
Infosys Technologies 21
TCS (TCS) 25
Wipro (WPRO) 29
HCL Technologies 33
Disclosure appendix 37
Disclaimer 41
Contents