Macquarie Research:: Infosys Technologies- 3Q miss provides attractive entry point

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Infosys Technologies
3Q miss provides attractive entry point
Event
 We retain our positive view on Infosys post 3Q results. Feeble volume growth
and muted 4Q outlook were the key negatives in 3Q. Even so, we remain
comfortable with our 29% FY12 US$ top-line growth forecast. Retain OP with
revised TP of Rs3,750 (vs Rs3,500 earlier).

Impact
 Maintain FY12 growth estimate of 29%. Our channel checks over the last
two months have indicated that FY12 should be another strong year for Tier 1
players. We are building in 29% YoY US$ revenue growth for the company
and downside risks to this is limited, in our view.
 3Q – did expectations go overboard? Volume growth for the quarter came
in at 3%QoQ (vs. our expectation of 6%). After a strong 2Q (7% vol. growth),
the street (including us) expected the party to continue unabated in 3Q.
However, it appears that seasonal influence was stronger than secular
demand trends. We refrain from extrapolating this quarter’s trend for FY12
estimates. On the positive side, 1.6% QoQ improvement in pricing helped the
company to report 6% higher revenues sequentially vs our expectations of 7%
(Fig 1).
 Don’t get carried away by lacklustre outlook. Infosys expects 4Q revenue
growth of 2% QoQ. This is based on pure volume growth and no pricing
improvement. Current guidance is overly cautious, in our view, and we expect
the company to deliver 6% QoQ growth in the Jan–Mar 2011 quarter.
 Traction in product business evident in the quarter. Product revenue
contribution crossed the 5% mark in 3Q growing 29% QoQ. We believe the
company’s banking product has considerable potential and will potentially be
a key growth driver

 3Q results: Infosys reported 3Q dollar revenues of US$1,585m (up 6% QoQ).
In rupee terms, the company delivered revenues of Rs71bn, EBITDA margin
of 33.2% (down 10bps QoQ) and EPS of Rs31.14.

Earnings and target price revision
 Post 3Q results, our revised EPS is Rs121 (down 2%) for FY11, Rs150 (up
3%) for FY12 and Rs184 (up 5%) for FY13. Our new DCF-based TP is
Rs3,750. Our estimate changes are largely linked to revised currency forecast
and there is no change to our business assumptions (see Fig 5).

Price catalyst
 12-month price target: Rs3,750.00 based on a DCF methodology.
 Catalyst: Annual guidance in April 2011 and finalisation of client budgets.

Action and recommendation
 Retain Outperform. We believe the underlying business momentum is
robust and the 5% correction in stock price post results provides an attractive
entry point.