Infosys Technologies Strong 2Q priced in:: Indiabulls research

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Infosys Technologies Strong 2Q priced in



Infosys has reported a strong 2QFY11 posting a 10.2% QoQ growth in revenues (USD terms) vs our expectation of 7%. However, PAT is in line at `17.37bn (on the back of a 117bps sequential increase in effective tax rates). With current valuations at 21x FY12, and headwinds from a strengthening INR, we believe the strong 2Q performance is priced in. Reiterate Neutral with a price target of `3,250 (`3,212 earlier).
Outperformance driven by 3% increase in average realised rates
The surprise during the quarter was driven by a 3% increase in average realised rates on the back of a higher contribution from enterprise application services (EAS) and system integration (together accounting for 55% of incremental revenues).
BFSI and retail: Biggest contributors to growth in 2QFY11
BFSI and retail together contributed 55% to incremental revenues of $138mn (highest-ever incremental revenue additions for Infosys). BFSI grew by 8% while retail grew by 20% QoQ. Other verticals like energy & utilities (15.7% QoQ), manufacturing (6.8% QoQ), and telecom (3.9% QoQ) also showed good growth.
2QFY11 guidance lower than expectations
Infosys EPS guidance of `115-117 is lower than our expectations of `118-120 on the back of a 130bps impact on PAT margins due to higher effective tax rates and a stronger INR. FY11 revenue growth guidance of 25% and 3Q revenue growth guidance of 4.4% implies a 1.3% QoQ growth in 4Q, which is conservative in our view.
Revise estimates marginally to factor higher exit run-rate into FY12
We revise our estimates marginally to factor in the tail wind from a strong 2Q and room for upgrade on conservative implied 4Q guidance (1.3% QoQ implied for 4Q). We increase our FY11E EPS by 2.6% to `124.3 (`121.2 earlier) and FY12E EPS marginally (1.1%) to `147.7 on the back of a higher exit run-rate for FY11.
However, current valuations limit upsides
We see limited upside to Infosys at 21x FY12E EPS of `147.7 with headwinds from currency and lack of clarity around CY11 budgets. We also see no room for any meaningful upgrades for FY12. Reiterate Neutral with a price target of `3,250 (`3,212 earlier).