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3QFY2011 Result Reviews
Infosys Technologies
During 3QFY2011, Infosys reported revenues of US $1,585mn with a mere growth of 5.9%
qoq. This is primarily on the back of merely 3.1% qoq volume growth and 3.9% qoq decline
in revenues from telecom vertical in constant currency terms. The cross-currency has
benefited revenues by 1.2%. In rupee terms, the revenues came in at `7,106cr, just 2.3%
qoq growth due to rupee appreciation of 3.5% qoq against USD in 3QFY2011. EBITDA
margin came in flat at 33.3%, despite of weaker utilisation and stronger rupee due to higher
revenue productivity realized on account of portfolio shift to higher value services. PAT stood
at `1780cr, 2.5% qoq growth with EPS of `31.15. We expect Infosys’ revenue and PAT to
witness CAGR of 22.4% and 15.5% over FY2010-12E, respectively. At the CMP of `3,212,
the stock is trading at 22x FY2012E EPS of `145.9. We recommend an Accumulate on the
stock with Target Price of `3605.
Infosys Technologies (Infosys) reported its 3QFY2011 result, which was below
street as well as our expectations. This underperformance is attributed to higher
number of days of customer closure especially at some of its top client sites this
holiday season resulting in drop in utilisations and lack of any budget flush.
However, management’s outlook for CY2011 is upbeat with strong hiring
numbers, cooling of attrition, emergence of higher number of transformational
engagements and positive client budgets across verticals including telecom.
Hence, we expect revenue growth (in USD terms) to be very promising at 26.3%
CAGR over FY2010-12E and recommend an Accumulate on the stock, with a
Target Price of `3,605, valuing it at 24.7x FY2012E EPS of `145.9.
Disappointing revenue growth: Infosys reported revenues at US $1,585mn, a
5.9% qoq growth. Growth in INR terms came in much lower at `7,106cr, a 2.3%
qoq growth on the back of rupee appreciation of 3.5% qoq against USD.
EBITDA margins maintained: The company managed to hold EBITDA margins at
33.3% despite headwinds like weak utilisation and stronger rupee due to better
pricing on account of portfolio shift towards higher end transformational services.
Outlook and Valuation: Management indicated that it is witnessing strong
demand in transformational services and expects it to be a growth driver going
ahead. A strengthening demand landscape saw Infosys make 26,000 campus
offers, expects conversion of ~70%, and has plans to hire ~25,000 laterals for
FY2012. This number is largely to map in demand as attrition has also cooled off
to ~13.7% (annualised). Thus, we expect Infosys to record strong revenue (INR
terms) CAGR of 22.4% and PAT CAGR of 15.5% over FY2010–12. We
recommend an Accumulate on the stock, with a Target Price of `3,605.
Muted volume growth due to seasonality in 3Q
The company reported revenues of US $1,585mn v/s our expectation of
US $1,626mn, up merely 5.9% qoq. This was primarily on the back of muted
volume growth of 3.1% qoq and decline in revenues from telecom vertical by 3.9%
qoq in constant currency (CC) terms. The cross-currency movement benefited
revenues by 1.2%. Revenues in CC terms came in at US $1,566mn, up 4.7% qoq.
The volume growth of 3.1% qoq was primarily driven by offshore volume growth of
3.5% qoq, whereas onshore grew at a mere 2.3% qoq. The company witnessed
portfolio shift towards higher revenue per employee type of services like consulting
and package implementation. Thus, revenue growth stood tad higher than volume
growth at 5.9% qoq due to productivity gain of 1.6% qoq in addition to
cross-currency benefits of 1.2% derived due to dollar depreciation of 1.9%, 5.1%
and 9.1% qoq as against the GBP, Euro and AUD, respectively.
In rupee terms, revenues came in at `7,106cr, just 2.3% qoq growth due to rupee
appreciation of 3.5% qoq against the USD in 3QFY2011.
Modest growth across service verticals, industries and
geographies
The discretionary services posted decent growth with product engineering services
(contributed 2.6% to overall revenues) leading the pack with 6.4% qoq growth. The
consulting & package implementation service, one of the anchor service vertical for
the company (contributed 25.9% to overall revenues), registered 2.7% qoq growth.
The investments in this vertical is mostly focused on simplifying internal processes,
harmonising business processes across the enterprise, and the major drive is
towards making organisations smarter and leaner - primarily focused on
increasing efficiencies and reducing throughput. BPO also registered 2.3% qoq
growth with the share of revenues of non-voice component increasing from 82% in
2QFY2011 to 85% in 3QFY2011. The products segment grew by a whopping
29.1% qoq due to good traction in the Finnacle product solution for the banking
space.
Industry-wise, the growth rates were modest. The anchor BFSI segment (contributed
36.2% to revenues) continues to be the growth driver registering 7.1% qoq growth
(CC terms) as more and more spend towards risk management, fraud prevention,
anti-money laundering and regulatory compliance is gaining momentum along
with persistent spend in work related to M&A’s. Infosys won nine clients in this
segment during 3QFY2011, out of which three are Fortune 1000 companies. The
insurance sector, which is a conservative spender, has also started spending on
customer relationship management solutions. Manufacturing (contributed 19.6% to
revenues) also registered strong 8.6% qoq growth (CC terms), especially with
industries like hi-tech and semiconductor looking at immediate go-to-the-market
strategies and spending on product engineering, supply chain management and
consulting to drive cost efficiencies and targeting to go global. In the
manufacturing segment, automotive and aerospace have now started spending on
dealer management network, CRM applications, global launch and product
engineering. Retail (contributed 14.5% to revenues) grew 5.8% qoq (CC terms)
extending the strong 19.9% qoq growth recorded in 2QFY2011. This vertical is
witnessing good traction due to clients looking at multi–channel integration to
encash on the digital consumer behaviour. Telecom (contributed 12.5% to
revenues) remained sluggish, de-growing by 3.9% qoq (CC terms) in 3QFY2011
due to effect of higher number of days of customer closure this holiday season
resulting in drop in utilisations.
Also, growth across geographies was modest. North America maintained its
growth momentum with 4.2% qoq growth (CC terms). Growth in Europe remained
sluggish at 3.7% qoq (CC terms). Rest-of-the-world growth stood robust at 9.7%
qoq (CC terms), reflecting growth in the products service vertical.
Hiring spree continues
Infosys added 11,067 gross employees in 3QFY2011, out of which 5,212 was
lateral addition. This was primarily because of continuing buoyant demand, which
resulted in hiring in more laterals. Net addition stood at 5,311 employees in
3QFY2011. On LTM basis, attrition rate inched up to 17.5% from 17.1% in
2QFY2011, but this is the effect of the higher rates in the previous quarter. For the
quarter, on absolute basis it fell to 3,561 employees v/s 4,233 and 5,400 in
2QFY2011 and 1QFY2011, respectively
Utilisation dipped due to lesser number of working days this December end
quarter vis-à-vis other quarters because of higher number of days of customer
closure this holiday season.
Margins maintained
The company managed to maintain its EBITDA as well as EBIT margins qoq at
33.3% and 30.2% respectively, despite weaker utilisation and stronger rupee due
to higher revenue productivity realised on account of portfolio shift to higher value
services
Client pyramid enhances
The company added 40 new clients during the quarter. Almost all the brackets in
the client pyramid showed considerable improvement. The company added one
client each in the US $50-100mn and US $100-200mn brackets. Also, six clients
were added in the US $10-20mn bracket. Active client base of the company
increased from 592 in 2QFY2011 to 612 in 3QFY2011. Out of the clients added,
40 were added from the Fortune 500 and 7 from the Global 1000, indicating a
focus on qualitative client addition.
Another upward revision in annual guidance
Infosys has revised its FY2011 revenue guidance from the earlier 24-25% to
25.7-26.1% yoy to US $6.04–6.06bn, and EPS from the earlier 10.4-12.2% to
13.0-13.5% yoy to US $2.60–2.61. In rupee terms, revenue guidance for FY2011
has been raised from 18.5–19.4% to 20.4–21.6% yoy to `27,408–27,481cr, and
EPS guidance has been raised from 5.5–7.4% to 8.9–9.1% yoy to
`118.68-118.90.
The revision in guidance is not significant owing to the caution shown on no
possible budget flush in 4QFY2011 as the clients decide their annual budgets.
Outlook and Valuation
Management indicated that it is witnessing strong demand for its transformational
services and expects it to be the growth driver. It is witnessing return of large
number of deals with typical sizes of US $30-100mn. On the back of a
strengthening demand landscape, the company has made 26,000 campus offers
and expects conversion of ~70%, and plans to hire ~25,000 laterals for FY2012.
This number is largely to map in demand, as attrition has also cooled off to
~13.7% (annualised). Also preliminary budgets for IT spending by most of its
clients, point at marginal growth, with few of them only pointing at flat budgets.
Moreover, the budgets now have higher offshore component. Management has
also pointed at the possibility of maintaining its margins despite headwinds of
moderate wage inflation expected in FY2012 on the back of the strong deal
pipeline, which is expected to drive robust growth. Thus, we expect the company to
record strong revenue CAGR of 22.4% (in INR terms) and PAT CAGR of 15.5%
over FY2010–12. We recommend an Accumulate on the stock, with a Target Price
of `3,605, valuing it at 24.7x FY2012E EPS of `145.9.
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