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UBS Investment Research
Infosys Technologies Ltd.
3Q FY11 disappoints on low volumes
„ 3Q disappoints, led by slower than expected volume growth
Infosys reported revenue of Rs71bn, 1.3% below our estimates, and net profit of
Rs17.8bn, 3.4% below estimates. The key disappointment was the 3.1% QoQ
volume growth, vs. our estimate of 6.2% QoQ. The management attributed this to a
lack of budget flush in the December quarter. In addition, the company lost billing
days due to higher corporate closures during the quarter
„ Margins stable, helped by offshore pricing, higher product sales
Operating margins at 30.2% were flat, in line with estimates. The quarter saw
150bp headwind due to currency moves, which was offset by increase in pricing
and higher product sales (Finacle and others, up 33.7% QoQ). Offshore pricing in
constant currency terms grew 1.4% QoQ after eight quarters of decline.
Consolidated pricing went up 0.5% in constant currency terms and 1.6% in
reported terms
„ 4Q FY11 outlook weak, FY11 guidance upgrade lower than expected
4Q FY11 guidance is lacklustre with revenue growth guidance of 1-2% and flat
EPS. Full year FY11 revenue guidance has also been marginally upgraded by 1-2%
versus our estimate of 3-4%.
„ Valuation; retain Neutral, adjusting EPS to reflect 3Q FY11 earnings
We cut our EPS forecasts by marginally by 0.8%/1.2% in FY11/12 to adjust for 3Q
FY11 earnings. We remain cautious and expect near term correction in stock price
post the run up over the last few weeks. Maintain Neutral with a DCF based target
price, with WACC of 11.5% and terminal growth of 3%.
Disappointing 3Q, mainly due to muted volume growth
While dollar revenue at US$1,585 mn was close to our estimate of US$1,591mn,
this was about 1% lower than consensus forecast. We were more disappointed
by the 3.1% QoQ growth in IT services volumes. While we agree that both sellside and investor expectations were high, we believe that the sequential growth
in volume was lacklustre even on an absolute basis. The company attributed this
to the lack of a budget flush in the December quarter, as well as more client
closures witnessed in December as a result of the business environment.
Other metrics remained relatively healthy during the quarter – the key positive
was the improvement in blended pricing (1.6%% QoQ), aided by 1.1% impact
due to cross currency moves. On a constant currency basis, offshore pricing was
up 1.4% QoQ, the first after eight quarters of decline.
Cuts to consensus EPS estimates are likely
We have cut EPS estimates for FY11/12 by 0.8%/1.2%, following the weaker
than expected performance in 3Q and anaemic guidance (1-2% in revenue and
flat EPS) in 4Q FY11. We expect consensus to also adjust EPS estimates
downwards, the first such cut in 8 quarters.
While the quantum of EPS cuts is not material, we believe that this reduces the
probability of significant EPS upgrades over FY12/13, in line with our view.
Consensus EPS growth expectations for FY12 are currently 2.5% ahead of our
estimates, which we believe could be revised downwards given the extremely
high expectations in the some parts of consensus (Bloomberg FY12 EPS
estimates: Rs136-171 versus median of Rs150)
Q Infosys Technologies Ltd.
Infosys is the second largest IT services company in India with US$4.8bn
revenue and around 114,000 employees in FY10. Its services include application
development and maintenance, consulting services and package implementation,
business process management, infrastructure management, and testing services.
It provides these services to international clients through offshore development
facilities in India and other global centres. Infosys derives 66% of its revenue
from the US, 23% from Europe, and the rest from Asia Pacific.
Q Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
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