Visit http://indiaer.blogspot.com/ for complete details Focus on growth, not rupee. Broad-based double digit sequential revenue growth,
increase in realization, further improvement in client metrics and increased off-take for
discretionary services once again reaffirm Infosys’ execution and significant improvement
in demand environment. We increase our FY2012E EPS estimate by 2.2% to Rs153.4
despite an adverse change in our Re/US$ assumption. We maintain our BUY rating with
end-FY2012E DCF-based target price of Rs3,400/share.
Excellent quarter; meets and, on most parameters, beats expectations
Infosys reported a strong quarter on all parameters beating our higher-than-consensus revenue,
EBITDA, and net income estimate for the quarter. Double-digit (10.2%) sequential revenue growth
to US$1.5 bn beat our estimate by 0.9%. Even as EBITDA margin came in 30 bps below
expectations, absolute EBITDA and net income both beat our estimate by 0.7%. More importantly,
several reported operational metrics indicate likely sustenance of demand momentum – we discuss
the same below.
Unequivocal verdict on the strength of demand environment
Infosys’ Sep 2010 quarter revenue performance validated our thesis on the strong demand
environment for offshore IT services (especially the Tier-I players). More important, however,
are the underlying demand metrics, which should allay any undue fears on the strength and/or
sustainability of the strong demand. Sample these – (1) growth was broad-based across verticals,
geographies, and service lines, (2) strong traction in the hitherto pockets of weakness; for example,
European revenues grew 15.6% qoq in constant currency, (3) strong mix in discretionary-spendled
service lines (package implementation, consulting, SI), (4) robust large deal signings
(transformational as well as global sourcing), (5) six F/G-500 account signings; the company has
just come out of its strongest year of ‘must have’ account signings (24 in FY2010), and (6) robust
revision in FY2011E US$ revenue growth guidance (to 25% from 21%).
Strong growth will take care of margin challenges (Re and otherwise); reiterate BUY
Our EPS estimate for FY2012E is up 2.2% to Rs153.4, despite building in a 3.2% stronger Re
versus the US$ against our previous estimate. This has been driven by a 4.9% upward revision in
our FY2012E US$ revenue estimate. We see upside risks to even our revised revenue growth
estimates (27.4%, 24.6%, and 21.3% in FY2011E, 12E, and 13E, respectively) – we reiterate our
view that the Indian IT services industry is not in a demand-constrained environment. We raise our
end-March 2012E DCF-based target price to Rs3,400/share and reiterate our BUY rating on the
stock. Valuation at 20X FY2012E EPS appears rich but has to be viewed in the context of earnings
upgrade potential.
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