Infosys Technologies' Q2FY11 results (Outperformer): says IDFC Research

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Infosys (CMP: Rs3076)            

Mkt Cap: Rs1.8tr; US$41bn       Bloomberg code (INFY IN)

 

Key result highlights

 

·         Healthy quarterly results: Revenues grew ~10% qoq and ~30% yoy to US$1,496 m (ahead of IDFC exp: US$1,468m). Further, driven by INR weakness, revenues were Rs69bn – a growth of ~12% qoq and ~24% yoy (IDFC Exp: Rs68bn). EBIT margin increased by ~190bp qoq (in line with expectations); net profit was Rs17.4bn (in line with expectations); and EPS was Rs30.4 – an increase of 16.7% qoq and 13.2% yoy (in line with expectations).

 

·         Strong demand momentum: In consolidated IT services, the company reported volume growth of 7.2% qoq while pricing improved 2.4% qoq in constant currency terms, helped 0.7% qoq by cross currency tailwinds. Strong volume-led growth underpinned strong demand for offshore IT services. In constant currency, onsite pricing was up 2.4% qoq while offshore pricing was down 0.4% qoq. The management expects the pricing to remain stable.

 

·         Supply-side challenges abating: The company saw gross hiring of ~14,000 employees and net hiring of 7,600 employees. TTM attrition inched up to 17.1% (+1.3% qoq), though the management indicated that absolute employee attrition for Q2 was lower than that in Q1. Infosys is promoting ~12,000 employees starting Oct-10 – this will lead to ~US$7m impact in Q3. Annual gross hiring target rose to 40k with 11k seen in Q3FY11.

 

·         Outlook still very conservative: The management raised FY11 USD revenue growth outlook by ~4% to 24-25%. This builds <2% qoq growth in Q4 on top of conservative ~4% qoq growth in Q3 – the management remains conservative and we expect another beat-and-raise Q3FY11. INR-terms guidance reflects stronger local currency.

 

·         Management commentary positive yet cautious: In H1FY11, Infosys won nine transformational deals as well as nine large outsourcing deals. It indicated that clients were spending in line with IT budgets and discretionary spend has returned. However, the company has cautioned that the overall macroeconomic environment still remains challenging with limited visibility beyond a few quarters and most of the work focused on cost efficiencies.

 

Valuations and view: Strong quarterly revenues, healthy operational performance and a well-managed supply side show flawless execution from the IT bellwether. Q3 and FY11 guidance still builds lot of conservatism, and we maintain our Street-high estimates. While global macroeconomic environment remains the key variable for FY12 forecasts, we believe that Infosys is one of the best placed to manage the uncertainty and leverage growth opportunities. Trading at ~25x FY11E and ~20x FY12E EPS, we rate Infosys as Outperformer with a 12-month target of Rs3,600 (based on 23x FY12E EPS). We expect the stock to moves sideways till some clarity emerges on the economic front and CY11 IT budgets.