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Infosys Technologies Ltd
Q3FY11 results below expectations; US$ guidance muted
Infosys reported Q3FY11 below expectations. Revenues grew 2.3% QoQ in Re
and 6% Q/Q in USD terms (4.7% in CC) driven by 1) 3% Q/Q volume growth
(vs. 7%QoQ expectations), 2) offshore pricing improvement of 2.6% QoQ (1.6%
blended QoQ) and 3) cross currency benefits. Margins were flat QoQ despite
currency headwinds, led by improvement in pricing. Overall, EPS at Rs 31/share
was up 2.5% Q/Q largely inline with our expectations, but below street numbers.
Metrics - 1) Pricing improved 2.6% offshore (1.4% CC), 2) Reported attrition was
at 17.5% flat QoQ and net addition was lower at 5,311 (7,646 in Q2), 3)
Utilisation edged lower to 71% (74% in 2QFY11), 4) Europe saw a soft 3.7% CC
QoQ growth, while Americas growth came off to 4.2% CC (7.5% CC in 2Q).
Guidance soft, beating expectations remains a challenge: The volume growth
this quarter was below expectations and with cautious commentary, the
management is guiding to 2% US$ revenue growth in 4QFY11 and ~26% growth
for FY11 (25% earlier). Full year rupee EPS guidance was increased only
marginally to Rs 118-119/share (Rs 115-Rs 117 earlier) due to modest volume
growth and rupee apprectiaton. We believe it might be difficult to meet the FY11
street expectations of Rs122-125, as it would imply c10% QoQ EPS growth in
4QFY11. We continue to believe that consensus estimates are already too high
and there could infact EPS downgrades.
Takeaways: Infosys results and management commentary highlight the macro
risks and soft volume traction is a negative surprise. We believe that TCS and
Wipro could see similar volume challenges and EPS growth to be largely inline
with Infosys. Additionally we believe that results also indicate that earnings
expectations remain high.
Investment View: Overall a disappointing quarter from Infosys with soft volume
growth and a muted guidance for 4QFY11. While the near term demand
momentum remains good, we believe that expectations are running ahead of on
ground fundamentals. Further post the recent upgrades consensus estimates
factor in strong volume momentum in FY12/FY13 and we believe that there is
limited comfort at current valuations (P/E ) of 28x/23x on FY11E/FY12E. We do
not expect any material change to our estimates and maintain our Neutral view
on Infosys.
Q3FY11 highlights
™ Infosys reported dollar revenue growth of 5.9% QoQ for Q3FY11. Volume growth
was at 3% QoQ; and pricing improved 0.5% QoQ in constant currency.
™ Pricing was down 1.4% QoQ CC for offshore and up 0.2% CC QoQ for onsite
projects with blended rates up 0.5% QoQ CC.
™ North America grew 4.2% QoQ CC; while Europe up 3.7% in CC.
™ The proportion of fixed price contracts was at 43.3% compared to 42% in the
preceding quarter.
™ In terms of verticals, BFSI revenues grew 7.1% QoQ in constant currency and
manufacturing grew 8.6% QoQ (CC) while retail grew 5.8% (CC) and telecom
declined 3.9% CC.
™ Infosys added 5,311 employees (net), taking its total employee base to 127,779.
™ Attrition inched up to 17.5% during the quarter from 17.1% in Q2FY11.
™ Utilisation moved down to 80.5% excluding trainees and 71% including trainees.
™ EBIT margins was flat QoQ.
™ Client additions for the quarter numbered 40 versus 27 in the previous quarter.
™ Net profit grew 2.5% QoQ in rupee terms and 6.1% QoQ in dollar terms.
™ Cash balances totalled US$ 3.3bn.
Guidance
Rupee
™ FY11: Infosys has guided for revenue of Rs 274bn–275bn, a growth of 20.5–20.8%
YoY, and EPS of Rs 118.7–118.9, a growth of 8.9–9.1% YoY. Excluding the impact
of a one-time sale of its investment in OnMobile, EPS growth is expected to be
between 9.7–9.9%.
™ Q4FY11: The management has guided towards revenue of Rs 71.6bn–72.3bn,
implying a 0.7–1.7% growth QoQ, and EPS of Rs 31.06–31.28 up -0.3%-0.4%
QoQ.
US dollar
™ FY11: Infosys has guided for revenue of US$ 6.04bn–6.06bn, a growth of 25.7–
26.1% YoY, and EPS of US$ 2.6–2.61, a growth of 13–13.5% YoY. Excluding the
OnMobile investment sale, EPS growth is expected to be between 14–14.5%.
™ Q4FY11: For Q4FY11, revenues are guided to be in the range of US$ 1,601mn–
1,617mn, up 1–2% QoQ, with an EPS of US$ 0.69–0.7, flat–1.4% QoQ.
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