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Infosys Technologies Ltd.
INFY: FY12 Operating Margin/EPS Guide Disappoints, Ests. Lowere
We Are Increasingly Concerned About Under-investment In Growth
• Summary: FQ4 Touch Light; Initial FY12 Guided Well-below Street
on Weaker Than Expected Operating Margin; Concerns Over Ability
to Grow Top-line Intensifying; Our Estimates Lowered. FQ4
($1.602bn/$0.70) touch light compared to Our ($1.626bn/$0.71) and Street
($1.633bn/$0.70) estimates, but within guidance ($1.601-1.617bn/$0.69-0.70).
Guidance was offered below expectation for revenue (slightly), operating margin
(notably) and for EPS (notably). We are lowering our FY12 EPS estimate to
$2.86 from $3.07, and initiating a FY13 EPS estimate of $3.32. While not
concerned about INFY's ability to manage/optimize the supply side of the model
(i.e. people and utilization), we are increasingly concerned that INFY is losing
share to providers such as Accenture (ACN) and Cognizant (CTSH) that have had
a consistent, and more aggressive, approach to demand generation. Also, visa
availability concerns rising again as Senator Grassley has asked for an
investigation of INFY's visa practices in wake of a late February employee
lawsuit. We are lowering our Valuation Range to $58-62 (21-22x CY11 EPS)
from $68-72 reflecting lower estimates and concerns about an out-of-sync
business model. Given the sharp share decline today, we are maintaining our
Market Perform investment rating.
• FQ4 Touch Light. Revenue of $1.602bn was up 24% yr/yr, but up just 1.1%
q/q. Volume declined q/q, but a favorable mix shift helped pricing. Financial
Services (BFSI) was notably weak q/q, which INFY indicated reflected a delay in
decision making on some larger deals. Operating margin of 29.0% notably
below our 30.5% estimate as aggressive hiring impacted utilization.
• FY12 Guidance Disappoints. Revenue (USD) guided up 18-20%. We had
modeled 20%. Operating margin guided down 300bp (100bp of which for FX).
We had modeled down just 30bp. We suspect management being overly
conservative, but they did focus on a desire to reduce utilization in the wake of
rising customer satisfaction concerns.
• Visa Concerns Return. Yesterday, Senator Grassley asked the Secretaries of
State and Homeland Security to investigate INFY in wake of a whistle-blower
suit filed in Alabama alleging inappropriate use of visas. (See our Note of
2/28/11.) This increases the risk of negative visa reform, in our view.
Valuation Range: $58.00 to $62.00 from $68.00 to $72.00
This represents 21-22x our CY2011 EPS estimate. Reflects lower estimate and
rising concern over sustainability of growth rate and industry leading operating
margin. Risks to our valuation range being too conservative are INFY's history of
conservative guidance, more favorable FX movement, and limited impact from
rising visa headwinds.
Investment Thesis:
Infosys is a Tier I offshore-based provider of IT/BPO services with an enviable
long-term track record for growth. Disappointing FY12 guidance increases our
concern that INFY has under-invested in client touching capabilities that could lead
to pressure on growth rates and operating margin over-time. Alabama employee
whistle blower suit also raises concern about visa headwinds.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies Ltd.
INFY: FY12 Operating Margin/EPS Guide Disappoints, Ests. Lowere
We Are Increasingly Concerned About Under-investment In Growth
• Summary: FQ4 Touch Light; Initial FY12 Guided Well-below Street
on Weaker Than Expected Operating Margin; Concerns Over Ability
to Grow Top-line Intensifying; Our Estimates Lowered. FQ4
($1.602bn/$0.70) touch light compared to Our ($1.626bn/$0.71) and Street
($1.633bn/$0.70) estimates, but within guidance ($1.601-1.617bn/$0.69-0.70).
Guidance was offered below expectation for revenue (slightly), operating margin
(notably) and for EPS (notably). We are lowering our FY12 EPS estimate to
$2.86 from $3.07, and initiating a FY13 EPS estimate of $3.32. While not
concerned about INFY's ability to manage/optimize the supply side of the model
(i.e. people and utilization), we are increasingly concerned that INFY is losing
share to providers such as Accenture (ACN) and Cognizant (CTSH) that have had
a consistent, and more aggressive, approach to demand generation. Also, visa
availability concerns rising again as Senator Grassley has asked for an
investigation of INFY's visa practices in wake of a late February employee
lawsuit. We are lowering our Valuation Range to $58-62 (21-22x CY11 EPS)
from $68-72 reflecting lower estimates and concerns about an out-of-sync
business model. Given the sharp share decline today, we are maintaining our
Market Perform investment rating.
• FQ4 Touch Light. Revenue of $1.602bn was up 24% yr/yr, but up just 1.1%
q/q. Volume declined q/q, but a favorable mix shift helped pricing. Financial
Services (BFSI) was notably weak q/q, which INFY indicated reflected a delay in
decision making on some larger deals. Operating margin of 29.0% notably
below our 30.5% estimate as aggressive hiring impacted utilization.
• FY12 Guidance Disappoints. Revenue (USD) guided up 18-20%. We had
modeled 20%. Operating margin guided down 300bp (100bp of which for FX).
We had modeled down just 30bp. We suspect management being overly
conservative, but they did focus on a desire to reduce utilization in the wake of
rising customer satisfaction concerns.
• Visa Concerns Return. Yesterday, Senator Grassley asked the Secretaries of
State and Homeland Security to investigate INFY in wake of a whistle-blower
suit filed in Alabama alleging inappropriate use of visas. (See our Note of
2/28/11.) This increases the risk of negative visa reform, in our view.
Valuation Range: $58.00 to $62.00 from $68.00 to $72.00
This represents 21-22x our CY2011 EPS estimate. Reflects lower estimate and
rising concern over sustainability of growth rate and industry leading operating
margin. Risks to our valuation range being too conservative are INFY's history of
conservative guidance, more favorable FX movement, and limited impact from
rising visa headwinds.
Investment Thesis:
Infosys is a Tier I offshore-based provider of IT/BPO services with an enviable
long-term track record for growth. Disappointing FY12 guidance increases our
concern that INFY has under-invested in client touching capabilities that could lead
to pressure on growth rates and operating margin over-time. Alabama employee
whistle blower suit also raises concern about visa headwinds.
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