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Infosys Technologies
Below expectations
Infosys reported a weak set of 4Q11 results - US$ revenues up 1.1% qoq (RBS est
3.4%) and EBIT margin decline of 122bp. FY12 US$ revenue guidance of 18-20%
growth was line with our expectations, though the EPS guidance of Rs126-128
falls far short of our expectations.
Muted 4Q11 revenues due to qoq decline in volumes
! Infosys reported revenues of US$1.60bn, a qoq growth of 1.1% as compared to guidance of
1.0-2.0% revenue growth. Excluding the impact of cross-currency benefit versus guidance,
Infosys has missed the lower end of the guidance. Revenues were 2.2% below our estimate
of US$1.64bn.
! IT services volumes surprisingly dropped 1.4% qoq (RBS estimated a 3.4% volume increase)
which was even lower than the management’s internal expectations. However average
realisations were up 2.4% qoq (including a 3.6% increase in offshore realization) which is
largely driven by like to like pricing increase with some cross currency tailwinds of 30-40bp
qoq.
! Geographically, revenues from the US were down 0.5% qoq on constant currency, while
Europe and RoW were up by 1.6% and 2.1% respectively.
! After several quarters of healthy growth, the BFSI vertical revenues were down 0.7% qoq in
constant currency. While revenues from Telecom declined by 4.8%.
! From a service line perspective, ADM revenues were up by 1.1% in reported currency, while
Consulting/PI revenues were down 0.9% qoq.
! Management said that clients have become more attuned to macro-economic situation, and
tend to make immediate adjustments to spending levels, which has resulted in incremental
qoq sluggishness over and above seasonal weak trend in 4Q. However management is more
confident on CY11 budget spend as reflected in higher than expected recruitment in 4Q11 as
well as guidance for adding 45000 employees on gross basis versus 43120 added in FY11.
Margins came under pressure due to drop in utilization
! EBIT margin of 29.0% in 4Q11 was down 122bp qoq, lower than our estimate of 30.5%. This
was broadly driven by lower gross margins, while SG&A costs held steady as a percentage of
revenues.
! This was driven by a sharp 420bp drop in utilization levels, as volumes declined while the
company added 2.4% to its hedcount during the quarter.
! Other income was up 43.1% qoq to Rs4.15bn. This includes forex gains of Rs410m (Rs160m
gain in 3Q11). Effective tax rate was up at 27.8% versus 27.0% in 3Q11.
! Consequently, PAT was up 2.1% qoq to Rs18.18bn, lower than our estimate of Rs18.56bn.
FY12 revenue guidance in line with expectations, EPS guidance disappoints
! Infosys guided to FY12 revenues of US$7.13-7.25bn, a yoy growth of 18-20%. Though the
guided growth rates are in-line with our expectations, the guidance did not excite the street
with low 4Q11 base. This factors in a qoq growth of 2.5-3.5% for 1Q12, and a 5.5-5.9%
CQGR over 2Q12-4Q12.
! FY12 EPS guidance of Rs126.05-128.21, implies a yoy growth of 5.5%-7.3% (versus US
dollar EPS growth guidance of 8-10%). This factors in a decline in EBIT margin by 300bp
(100bp due to currency, 110bp due to compensation increase of 10-12% for offshore and 2-
3% for onsite staff net of employee pyramid and the rest related to bench and hiring local
talent in onsite locations and non-linear initiatives). The guidance factors in qoq EPS decline
of 11.9-13.3% in 1Q12 and a 9.0-9.1% CQGR over 2Q12-4Q12.
We see marginal revenue forecast changes, but material EPS downgrades likely
! As dollar revenue growth guidance for FY12 comes broadly in line with our expectations and
on the back of weak 4Q11 revenues, we expect some revision to our revenue forecasts
downwards.
! However, management admitted that the margin decline of 300bp could be lower, if revenue
growth is higher than the guided 18-20%. Our forecast (before 4QFY11 results) builds in a
revenue growth of 25.6% for FY12. Hence we do not expect the margin decline to be as steep
as management guidance.
! Nevertheless, we should see downward revision in our margin forecasts for FY12, that are
currently projected to be flattish in FY12. Hence we expect material downgrade to our current
FY12F EPS of Rs150.8. We expect the street to also materially cut estimates of Rs149.8
(Bloomberg Consensus).
What next?
! TCS will announce its 4Q11 results on 21st April 2011. We expect TCS’s trend of
outperforming Infosys to continue on the Infosys’s weak 4Q11 results and therefore we
expect its P/E premium to continue.
! We will be revising our EPS forecasts and target price for Infosys downward and expect the
stock to remain under pressure in short-medium term.
! We expect investors to become more biased towards TCS in the near term. We have Buy
ratings on TCS and HCL Tech.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies
Below expectations
Infosys reported a weak set of 4Q11 results - US$ revenues up 1.1% qoq (RBS est
3.4%) and EBIT margin decline of 122bp. FY12 US$ revenue guidance of 18-20%
growth was line with our expectations, though the EPS guidance of Rs126-128
falls far short of our expectations.
Muted 4Q11 revenues due to qoq decline in volumes
! Infosys reported revenues of US$1.60bn, a qoq growth of 1.1% as compared to guidance of
1.0-2.0% revenue growth. Excluding the impact of cross-currency benefit versus guidance,
Infosys has missed the lower end of the guidance. Revenues were 2.2% below our estimate
of US$1.64bn.
! IT services volumes surprisingly dropped 1.4% qoq (RBS estimated a 3.4% volume increase)
which was even lower than the management’s internal expectations. However average
realisations were up 2.4% qoq (including a 3.6% increase in offshore realization) which is
largely driven by like to like pricing increase with some cross currency tailwinds of 30-40bp
qoq.
! Geographically, revenues from the US were down 0.5% qoq on constant currency, while
Europe and RoW were up by 1.6% and 2.1% respectively.
! After several quarters of healthy growth, the BFSI vertical revenues were down 0.7% qoq in
constant currency. While revenues from Telecom declined by 4.8%.
! From a service line perspective, ADM revenues were up by 1.1% in reported currency, while
Consulting/PI revenues were down 0.9% qoq.
! Management said that clients have become more attuned to macro-economic situation, and
tend to make immediate adjustments to spending levels, which has resulted in incremental
qoq sluggishness over and above seasonal weak trend in 4Q. However management is more
confident on CY11 budget spend as reflected in higher than expected recruitment in 4Q11 as
well as guidance for adding 45000 employees on gross basis versus 43120 added in FY11.
Margins came under pressure due to drop in utilization
! EBIT margin of 29.0% in 4Q11 was down 122bp qoq, lower than our estimate of 30.5%. This
was broadly driven by lower gross margins, while SG&A costs held steady as a percentage of
revenues.
! This was driven by a sharp 420bp drop in utilization levels, as volumes declined while the
company added 2.4% to its hedcount during the quarter.
! Other income was up 43.1% qoq to Rs4.15bn. This includes forex gains of Rs410m (Rs160m
gain in 3Q11). Effective tax rate was up at 27.8% versus 27.0% in 3Q11.
! Consequently, PAT was up 2.1% qoq to Rs18.18bn, lower than our estimate of Rs18.56bn.
FY12 revenue guidance in line with expectations, EPS guidance disappoints
! Infosys guided to FY12 revenues of US$7.13-7.25bn, a yoy growth of 18-20%. Though the
guided growth rates are in-line with our expectations, the guidance did not excite the street
with low 4Q11 base. This factors in a qoq growth of 2.5-3.5% for 1Q12, and a 5.5-5.9%
CQGR over 2Q12-4Q12.
! FY12 EPS guidance of Rs126.05-128.21, implies a yoy growth of 5.5%-7.3% (versus US
dollar EPS growth guidance of 8-10%). This factors in a decline in EBIT margin by 300bp
(100bp due to currency, 110bp due to compensation increase of 10-12% for offshore and 2-
3% for onsite staff net of employee pyramid and the rest related to bench and hiring local
talent in onsite locations and non-linear initiatives). The guidance factors in qoq EPS decline
of 11.9-13.3% in 1Q12 and a 9.0-9.1% CQGR over 2Q12-4Q12.
We see marginal revenue forecast changes, but material EPS downgrades likely
! As dollar revenue growth guidance for FY12 comes broadly in line with our expectations and
on the back of weak 4Q11 revenues, we expect some revision to our revenue forecasts
downwards.
! However, management admitted that the margin decline of 300bp could be lower, if revenue
growth is higher than the guided 18-20%. Our forecast (before 4QFY11 results) builds in a
revenue growth of 25.6% for FY12. Hence we do not expect the margin decline to be as steep
as management guidance.
! Nevertheless, we should see downward revision in our margin forecasts for FY12, that are
currently projected to be flattish in FY12. Hence we expect material downgrade to our current
FY12F EPS of Rs150.8. We expect the street to also materially cut estimates of Rs149.8
(Bloomberg Consensus).
What next?
! TCS will announce its 4Q11 results on 21st April 2011. We expect TCS’s trend of
outperforming Infosys to continue on the Infosys’s weak 4Q11 results and therefore we
expect its P/E premium to continue.
! We will be revising our EPS forecasts and target price for Infosys downward and expect the
stock to remain under pressure in short-medium term.
! We expect investors to become more biased towards TCS in the near term. We have Buy
ratings on TCS and HCL Tech.
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