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Infosys
Guidance conservative, positives priced in; maintain Hold
Infosys reported revenue of US$1,585m (up 6.1% qoq; 4.7%
constant currency growth). Volume growth in IT Services was
only 3.1% qoq, while pricing increased 160bps (up 50bps in
constant currency). Margin was flat qoq due to tight SG&A
containment. Revenue from the US and Europe grew 4.2% and
3.7% respectively (in constant currency terms). We maintain our
Hold rating.
Healthy outlook; positives priced in. Infosys guided for a
conservative 25.7-26.1% rise in FY11e US dollar revenue which had
already been largely built into our estimates. Management
commented that IT budgets are expected to be flat/marginally up
and CY11 is likely to be a normal year for the industry, and that
pricing uptick will take time.
FY11 guidance conservative, achievable. Infosys guided for
FY11e EPS of `119 (at INR44.7/USD). For 4QFY11e, it has
guided for 1-2% qoq increase in revenue, which is muted according
to our expectation.
Change in estimates, target price. We retain our FY11 estimates
while increasing FY12/13 earnings estimates 2.1%/2.4%, mainly to
account for pricing-rate increases and positive commentary by
Infosys management regarding IT budgets for CY11. We raise our
target price to `3,520 (24x Mar ’12e EPS, 24x maintained) from
`3,150. Key upside/downside risks: New services could provide
growth impetus/downward margin pressure.
Results review
Infosys’ 3QFY11 revenue grew 2.3% qoq (in rupee terms) and 6.1%
(in US dollar terms). Its margin was flat sequentially, mainly owing
to tight cost control (SG&A). Net profit rose 2.5% qoq. FY11 EPS
guidance is `119 (from `115-117 earlier). 3QFY11 results slightly
belied our expectation.
Revenue analysis
Revenue for 3QFY11 stood at `71bn, 0.7% less than our estimate (in
rupee terms). The average rupee-dollar rate realized for 3QFY11 was 44.9,
similar to our expectation.
In US dollar terms, revenue stood at US$1,585m, a 6.1% qoq rise (on
constant currency reporting, it was US$1,566m), which is 0.7% less than
our estimate. Revenue was contributed by IT Services, BPO and other
subsidiaries
Volume growth was lower than we expected, with volume rising just
3.1% qoq vis-à-vis our expectations of 6.3%. Pricing rose 2.8%
sequentially in dollar terms (vis-à-vis our estimate of 0.3% increase).
This led to the divergence in dollar revenue in 3QFY11.
IT Services’ revenue was lower than we estimated, by 2.1% in dollar
terms.
BPO performance was better than we anticipated, while other
subsidiaries’ performances, in terms of revenue growth, came higher
than we expected.
EBITDA margin
EBITDA margin matched our expectation. Wage costs, consumables costs
and outsourcing costs were higher than estimated. This was partly offset
by lower travel costs, marketing costs, communication and provisions.
Non-operating items
Other income – Other income was slightly lower than our estimate.
Foreign exchange profit for 3QFY11 stood at `160m vis-à-vis our
estimate of a `240m gain.
Effective tax rate – The tax rate was 27% vis-à-vis our assumed 26%.
Net profit growth
Net profit was 1.9% lower than our estimates, chiefly owing to lower
revenue and more-than-expected tax expense
Guidance
Infosys has guided for FY11 revenue growth of 25.7-26.1% (24-25%
earlier) in dollar terms. For FY11, similar pricing (3QFY11 level) has been
assumed for the purpose of the guidance. For 4QFY11, management has
guided for 1-2% sequential revenue growth in dollar terms, less than we
anticipated.
Our model assumes a 26.9% rise in dollar revenue, which is achievable
given the company’s past record of beating its own guidance – Infosys has
surpassed its guidance by more than 10% in five of the past eight years.
The rupee-based EPS guidance for FY11 implies 9.2-9.4% growth over
the FY10 EPS after assuming a 150bps drop in the operating margin,
primarily due to currency movements and wage hikes.
Client issues
Growth largely came from the top client and the top 2-5 clients, at 4.3%
qoq and 3.7% qoq respectively. In the quarter, Infosys added 40 clients
(gross, and 20 net), expanding the active-client list to 612.
Volume continues to lead the way
Billable volume has dropped to 68.7% of total volume.
Verticals breakdown
In terms of geography, RoW grew fastest at 11.8% qoq, Europe was up
2.6% and India 4.1%. In terms of industry, Manufacturing was up 5.9%
qoq, and Financial Services up 4.5% qoq.
Operational parameters
Attrition (LTM) increased 40bps to 17.5%, though it saw a decrease in
absolute terms, for the quarter. We believe that attrition would trail off
going forward.
Increase in gross hiring – Displaying confidence
Gross hiring for FY11 was maintained at 40,000, post-3QFY11 results,
indicating stable revenue visibility. In 3QFY11, 11,067 joined (gross),
though the net increase was only 5,311. Management indicated that it was
seeking to hire a number of laterals, again indicating healthy business
traction. In this quarter, Infosys recruited 5,212 laterals, the highest in any
single quarter.
Other key points
In constant currency terms, BFSI was up 7.1% qoq, Manufacturing up
8.6%, and Retail 5.8%.
In constant currency terms, North America was up 4.2%, RoW was
up 9.7%, and Europe 3.7%.
Cash balance at end-quarter was US$3.5bn, while DSO stood at 62
days.
The proportion of fixed-price in 3QFY11 was 41.2% compared with
39.9% in 2QFY11. Proportion of offshore revenue stood at 50.7%
compared with 49.8% last quarter.
The hedges at end-Dec stood at US$585m, translating into 0.35x
4QFY11e revenue.
Change in estimate
FY11 EPS has been maintained, while that for FY12/13 has been
raised 2.1%/2.4% to `143.7/`172, mainly to factor in pricing
increases and positive comments by Infosys management regarding
IT budgets for CY11. We raise our target price to `3,520/share and
maintain our Hold rating on the stock.
Minor estimate changes
1. The rupee-dollar conversion rate for 3QFY11 was 44.8. Hence, the
average rupee-dollar conversion rate for FY11 changed to 45.2, from
45.1 earlier. We have assumed a rate of `44 to the dollar for 4QFY11
and FY12/13.
2. We have increased volume growth for FY12/13 on better revenue
visibility and management’s commentary regarding positive IT
budgets, which are expected to be flat/marginally up, with CY11 likely
to be a normal year for the industry.
Valuation
We increase Infosys’ target price to `3,520 (from `3,150 earlier), based on
target PE of 24x Mar ’12e EPS of `146.7 (maintained 24x). We maintain
our Hold rating on the stock.
Risks
New services could provide growth impetus and ease pricing pressure.
Infosys focuses on its top accounts. Repeat revenue for 3QFY11 was
97.6%; any traction among new clients’ accounts could pose a risk to
our call.
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