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Infosys reported 10.2% sequential US dollar revenue growth - a first
since Q2FY08 and raised its dollar revenue growth guidance to 24-25%
vs. 19-21% earlier. Positive commentary on Europe, transformational
deals signed and improved hiring targets (40,000 heads vs. 36,000
earlier) suggests good demand visibility. However, attrition remains a
key concern.
Operating Metric Highlights
Application development grew 12% YoY and 2% QoQ and stood at
15.6% of the revenues. Consulting & system integration grew 14%
and 50% QoQ vs. 0.4% and -2.2% growth in Q1FY11, respectively.
Product engineering continues to see demand momentum with 31%
QoQ growth on top of 22% QoQ growth in Q1FY11. From a vertical
perspective, BFSI had another strong quarter with 8% QoQ growth
vs. 9% QoQ in Q1FY11. Retail grew 20% QoQ as clients continue to
spend top dollars before the holiday season. Geographically, Europe
grew 18% QoQ and the company saw demand uptick in Germany
and France. Top client revenues grew 5.7% QoQ while top 5
(excluding top 1) and top10 (excluding top 5) grew 17% and 12%
QoQ. It added 27 clients in Q2FY11 and signed nine transformation
deals with two having contract value of >$200 million.
Up-tick in onsite mix good but attrition remains a concern
Infosys added 14,264 gross heads while net additions were 6,186.
Noticeably, onsite effort increased 1.6 percentage points (pp) to
24.5% vs. 22.9% in Q1FY10 due to likely client ramp ups. This could
translate to demand for offshore heads in sequential quarters.
However, LTM attrition increased to 17.1% in Q2FY11, up 1.3 pp
compared to 15.8% reported in Q1FY11. Though the absolute
attrition numbers have fallen QoQ, we believe high attrition rates
could pressure volume growth, going forward.
Positive commentary from management on Europe and discretionary
spending suggests good traction across verticals and service lines.
Consequently, we expect revenues and net profit to grow at 23% and
15% CAGR during FY10-FY12, led by volume growth at ~22% CAGR and
value the stock at 22x FY12 EPS of Rs 145 i.e. with a 12 month target price
of Rs 3195 per share. We continue to recommend an ADD rating.
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