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Infosys Technologies (INFO)
Technology
March quarter to be weak, FY2012E strong. Seasonality and weak spending on
discretionary projects may lead to a weak 4QFY11 even as the company remains on
track for strong FY2012E performance. FY2012E revenue growth guidance may be
conservative at 18-20%, however, closure of IT budgets on time and broad-based
business recovery would help maintain our 27% US$ revenue growth projection.
Barring any major uptick in investments in new initiatives, pricing uptick should take
care of any pressure on margins. BUY for a 25% upside.
4Q to be weak, but then, it always has
We expect modest 3% qoq revenue growth for March 2011 quarter. This may disappoint the
Street, but we note that March is a seasonally weak quarter for the IT services industry due to
holidays and low discretionary spending. We also note that Infosys’ outperformance of the
guidance is the lowest in the March quarter (see Exhibit 1).
Revenue growth guidance of 18-20% likely for FY2012E
We expect Infosys to guide for 18-20% US$ revenue growth for FY2012E; this implies CQGR of
3.4 - 4.1%. The guidance may well be lower than our 27% revenue growth projection for
FY2012E, but we take comfort in (1) replacement of the M&A integration opportunity with larger
and sustainable regulatory compliance deals; (2) increase in capex spending in some of the drag
verticals such as telecom that will drive downstream opportunities and (3) ramp-up from new F-
500 relationships signed by the company. EPS guidance may range from Rs132 to Rs138 assuming
a Re/US$ rate of 45 and an assumed margin decline guidance of 150-200 bps (see Exhibit 2).
FY2012E margin performance to be determined by the extent of investments
Infosys has had positive discussions in pricing with most of the clients. We believe a 2-3% pricing
increase in FY2012E is possible (even if this does not figure in the company’s guidance at the
beginning of FY2012). This along with other operational levers should take care of margin
headwinds from wages/currency. However, margin performance may be impacted by investments
in driving up revenues from new engagement models. We understand that Infosys may invest
aggressively to drive revenues from NEMs to ~1/3 rd within three years. The company may also
invest in local hiring and ramping up its consulting team. Execution in some of these areas may
lead to some near-term pressure on margins though it would be a step in the right direction.
BUY for a 25%+ upside
We maintain our BUY rating on the stock with an unchanged target price of Rs3,700. We believe
the stock may remain weak in the run-up to the annual guidance; this should be seen as a buying
opportunity, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFO)
Technology
March quarter to be weak, FY2012E strong. Seasonality and weak spending on
discretionary projects may lead to a weak 4QFY11 even as the company remains on
track for strong FY2012E performance. FY2012E revenue growth guidance may be
conservative at 18-20%, however, closure of IT budgets on time and broad-based
business recovery would help maintain our 27% US$ revenue growth projection.
Barring any major uptick in investments in new initiatives, pricing uptick should take
care of any pressure on margins. BUY for a 25% upside.
4Q to be weak, but then, it always has
We expect modest 3% qoq revenue growth for March 2011 quarter. This may disappoint the
Street, but we note that March is a seasonally weak quarter for the IT services industry due to
holidays and low discretionary spending. We also note that Infosys’ outperformance of the
guidance is the lowest in the March quarter (see Exhibit 1).
Revenue growth guidance of 18-20% likely for FY2012E
We expect Infosys to guide for 18-20% US$ revenue growth for FY2012E; this implies CQGR of
3.4 - 4.1%. The guidance may well be lower than our 27% revenue growth projection for
FY2012E, but we take comfort in (1) replacement of the M&A integration opportunity with larger
and sustainable regulatory compliance deals; (2) increase in capex spending in some of the drag
verticals such as telecom that will drive downstream opportunities and (3) ramp-up from new F-
500 relationships signed by the company. EPS guidance may range from Rs132 to Rs138 assuming
a Re/US$ rate of 45 and an assumed margin decline guidance of 150-200 bps (see Exhibit 2).
FY2012E margin performance to be determined by the extent of investments
Infosys has had positive discussions in pricing with most of the clients. We believe a 2-3% pricing
increase in FY2012E is possible (even if this does not figure in the company’s guidance at the
beginning of FY2012). This along with other operational levers should take care of margin
headwinds from wages/currency. However, margin performance may be impacted by investments
in driving up revenues from new engagement models. We understand that Infosys may invest
aggressively to drive revenues from NEMs to ~1/3 rd within three years. The company may also
invest in local hiring and ramping up its consulting team. Execution in some of these areas may
lead to some near-term pressure on margins though it would be a step in the right direction.
BUY for a 25%+ upside
We maintain our BUY rating on the stock with an unchanged target price of Rs3,700. We believe
the stock may remain weak in the run-up to the annual guidance; this should be seen as a buying
opportunity, in our view.
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