Stock Market Update on Infosys

Stock Market Update on Infosys with an Accumulate recommendation and a Target Price of `3200 (12 months)

For 1QFY2012, Infosys reported results that were almost in-line with our as well as street expectations. The company’s performance was modest with 4.0% qoq volume growth. The disappointment came from lower-than-expected 2QFY2012 guidance of 3.5–5.0% qoq growth in USD revenue, which is seasonally the strongest quarter. Also, revenue growth guidance for FY2012 was left unchanged at 18–20% yoy growth. We expect revenue growth (in USD terms) to record a 21% CAGR over FY2011–13E. We recommend Accumulate on the stock.

Modest results: For 1QFY2012, Infosys reported revenue of US$1,671mn, up 4.3% qoq. In INR terms, revenue came in at `7,485cr, registering 3.2% qoq growth due to INR appreciation of 1.0% qoq against USD. The company’s EBITDA and EBIT margins declined by 298bp and 291bp qoq to 29.1% and 26.1%, respectively, due to wage hikes given in 1QFY2012, effective from April 1, 2011.

Outlook and valuation: Management has indicated 2QFY2012 revenue growth to be 3.5–5.0% qoq only and has kept the annual revenue guidance unchanged at 18–20% yoy. This implies an ask rate of 5.5% CQGR in revenue over 2HFY2012 to meet the upper end of the guidance. Also, in the midst of looming macro concerns and subdued ramp-ups in discretionary spending, the outperformance of 3–5% on management’s upper end of the guidance looks limited as it implies an ask rate of 6.5–7.5% CQGR in revenue over 2HFY2012. Being cognizant of the deteriorating macros, client-specific issues (BT account still being anaemic) and muted earnings guidance for FY2012, we have cut our EPS estimates for FY2012 and FY2013 to `137 and `160, respectively. Thus, we revise our one-year forward target PEx downwards to 20x from 21x and value the stock at a target price of `3,200 (earlier `3,424) and recommend Accumulate on the stock.

Stock Market Flash on Infosys for 1QFY2012

Stock Market Flash on Infosys for 1QFY2012

Infosys reported its 1QFY2012 results which were almost inline with our as well as street expectations. The revenues came in at US $1,671mn, up 4.3% qoq, on the back of 4.0% qoq volume growth. Onsite volume growth came in strong at 6.8% qoq and offshore volume growth came in at 2.7%. The cross-currency has benefited USD revenues by 1.2% qoq as the constant currency revenues came in at US$1,671mn, up 3.1% qoq. In rupee terms, revenues came in at `7,485cr, up 3.2% qoq. The EBITDA margin declined by 299bp qoq to 29.1% due to wage hikes given in 1QFY2012 (12-14% for offshore employees and 2-3% for onsite employees) effective from April 1, 2011. PAT stood at `1,722cr, down 5.4% qoq.

1QFY2011: Result highlights (IFRS, consolidated)

(` cr)	1QFY12	1QFY12E	% Var	4QFY11	% chg (qoq)	1QFY11	% chg (yoy)
Net revenue	7,485	7,435	0.7	7,250	3.2	6,198	20.8
EBITDA	2,175	2,178	(0.1)	2,324	(6.4)	1,962	10.9
EBITDA margin (%)	29.1	29.3	(23)bp	32.1	(299)bp	31.7	(259)bp
PAT	1,722	1,689	1.9	1,818	(5.3)	1,488	15.7
EPS (`)	30.1	29.6	1.8	31.8	(5.4)	26.1	15.6

Other key highlights:

·         Hiring remained decent with gross addition of 9,922 employees; however, net addition was just of 2,740 employees.

·         Attrition declined to 15.8% (LTM basis) vs. 17.0% in 4QFY2011

·         Utilisation (including trainees) inched up by 120bp to 69.6%. However, utilisation (excluding trainees) dipped by 30bp qoq to 74.9%.

·         In constant currency terms, geographies North America and Rest of the world grew by 5.1% and 2.4% qoq; however, Europe declined by 2.6% qoq

·         In constant currency terms, Industry segments like BSFI, Manufacturing and Retail & Lifesciences grew by 2.1%, 2.7% and 9.3% qoq; however, energy, utilities & communication declined by 1.4% qoq.

·         Client addition was modest at 26 clients this quarter, taking the total number of active client base to 628.

·         The FY2012, USD revenue growth guidance was left unchanged at 18-20% yoy to US$7.13- US$7.25bn, which was slightly disappointing. EPS guidance for FY2012 increased to US$2.88-US$2.92, yoy growth of 10-11.5% vs. previous guidance of 8-10% yoy growth.

·         2QFY2012 revenue growth guidance came in lower than our expectations at 3.5-5% qoq growth to US$1.73-1.75bn

Overall the results were modest with no surprises. However, the guidance numbers were disappointing indicating that management is banking on back ended growth which makes us cautious as the second half of every fiscal year is typically slow. We wait for managements’ clarity on client specific issues, if any, which may have led to erosion in revenues from Europe geography and also on their expectation about the nature and quantum of deals in pipeline for FY2012 given the unstable macros. The disconnect between macro and micro environment has been prevailing for quite sometime for Indian IT industry but Europe de-growth has been in sync with macro this time. We may downgrade our target price of `3,424 being cognizant of the effect of deteriorating macros.