Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies Limited
INFY: Reducing Estimates Largely On Margin
Disappointment
SUMMARY
INFY's FY12 revenue guidance of 18-20% growth appears reasonable although
dependent on 2Q/3Q sequential acceleration. We expected some operating margin
degradation, but the severity implicit in guidance is disappointing and hard to
reconcile, absent incremental investments. Consistent with INFY's revenue
guidance, we remain optimistic about industry demand trends heading into FY12.
We also view INFY's margin/EPS guidance as largely company-specific and not
reflective of increased competition/pricing pressure. We reduce our FY12E EPS by
5% and introduce an FY13E EPS, which suggests 11% EPS growth and assumes
further modest margin degradation. This note supplements our earlier note today.
KEY POINTS
n EPS for 4Q11 rose 18% Y/Y to $0.70 (vs. implied guidance of $0.68-0.69 and
our/Street estimate of $0.70/0.72). Revenue rose 1.1% Q/Q to $1.602B ($25M
below our estimate) although volumes declined 1.4% Q/Q. Operating margin fell
110bp Y/Y to 29.0% (vs. our 29.6% estimate) while other income was $28M
above our estimate (equivalent to $0.04/sh).
n INFY's revenue guidance of 18%-20% growth implies continued share gains for
offshore services relative to flat to moderately expanding IT-budgets in FY12.
INFY expects a more "normal" spending environment in FY12, and expects to
modestly out-pace offshore industry growth.
n FY12 revenue outlook of 18-20% Y/Y growth to $7.13-$7.25B (vs. our/Street
prior estimate of 18%/22%); EPS guidance of 8%-10% growth to $2.83-2.88 (vs.
our/Street's prior $3.05/3.27) reflects ~300bp margin pressure—100 bps for FX,
100 bps for higher wages, and 120 bps for lower utilization.
n We reduce our FY12E EPS to $2.89 (from $3.05 vs. guidance of $2.83-2.88)
and introduce a FY13E EPS of $3.20 (+11% Y/Y). Our FY12E EPS assumes
18.5% revenue growth and 260bp of margin compression; for FY13 we estimate
16% revenue growth and 70bp of margin compression.
n Following today's ~14% sell-off, the shares trade at 22x and 20x our FY12E and
FY13E EPS. While we believe secular growth trends remain intact, industry
fundamentals remain solid, and that our estimates could prove conservative.
However, we are unclear regarding the longer-term trajectory of INFY's margins.
While early in the March quarter earnings season, we believe INFY's disappointing margin/EPS
guidance is largely company-specific and not reflective of increased competition/pricing pressure.
Importantly, INFY's FY12 revenue guidance brackets our prior estimate and suggests industry demand
remains relatively robust heading into FY12. We believe INFY's revenue outlook is reasonable
although it implies sequential acceleration in 2Q and 3Q. Following today's ~14% sell-off, the shares
trade at 22x and 20x our FY12 and FY13 EPS estimates, respectively. Our FY13 EPS estimate
suggests 11% EPS growth and assumes 70 bps of further margin degradation. We are unclear if the
FY12 margin decline will set a floor for INFY going forward; essentially we are unclear regarding
INFY's longer-term margin trajectory as the natural offsets to margin pressure (pricing, organic
operating leverage, etc.) are not evident for FY12.
Results Summary: Infosys' 4Q:FY11 EPS rose 18% Y/Y to $0.70, which was in line with our estimate
(vs. guidance of $0.67-0.68 and the Street's $0.72 estimate). Other Income, which was $28M above
our estimate (or $0.04/sh) offset lower than expected revenue ($25M below our estimate) and margins
(60bp below our estimate). On the heels of 6% Q/Q revenue growth, 4Q:FY11 revenue rose +1.1%
Q/Q to $1.602B (vs. our $1.627B estimate and guidance of 1-2% Q/Q), driven by a 1.4% Q/Q drop in
volume (vs. +7% in 2Q and +3% in 3Q), which was offset by 2.1% Q/Q pricing growth (vs. 0.5% in
3Q:FY11). Operating margins fell 120bp Q/Q (-110bp Y/Y) to 29.0% (vs. our estimate of 29.6%).
INFY's tax rate rose to 27.7% (vs. 21.7% in 4Q:FY10), which pressured EPS by ~$0.06/sh Y/Y. For the
year, revenue rose 26% Y/Y to $6.04B, operating margins fell 100bp Y/Y to 29.4% and EPS rose 14%
Y/Y to $2.62; that said a higher tax rate in FY11 pressured EPS by $0.19 (pre-tax income rose 23%
Y/Y).
Guidance: FY12 guidance was disappointing. Revenue was in line with our estimate; however, the
midpoint for EPS was 6% below our estimate and 13% below the Street consensus—due to lower than
expected margins. On the heels of 26% Y/Y revenue growth, FY12 revenue is slated to grow 18-20%
Y/Y to $7.13-$7.25B (vs. our/Street prior growth estimate of 18%/22%). After 14% Y/Y EPS growth in
FY11, FY12 EPS guidance calls for 8-10% growth to $2.83-2.88 (vs. our/Street's $3.05/3.27) and
assumes a 26-27% tax rate (vs. 26.7% in FY11). Unfortunately, operating margins are expected to fall
~300bp Y/Y (our prior estimate called for a 60bp Y/Y decline to 29.0%). Management attributes the
margin pressure to FX (~100bp), wage inflation (~100bp) and lower utilization (~120bp). Guidance
assumes an average rupee rate of 44.5 in FY12 (vs. 45.54 in FY11), wages increase in India of
10-12% (2-3% on-site) and that pricing remains flat with 4Q:FY11 levels. While we anticipate margins
will remain pressured in FY12, we suspect INFY has several levers (pricing, organic operating
leverage) to mitigate margin pressure throughout the year. Guidance for 1Q:FY12 implies 2.6%-3.6%
Q/Q revenue growth (vs. our prior estimate of 3.5%) and EPS of $0.62-0.63 (vs. our/Street's prior
estimate of $0.70/0.71).
While 4Q:FY11 volume trends were disappointing and the FY12 margin outlook was well below
our/consensus expectations, INFY has historically provided conservative guidance. Consistent with
prior commentary and guidance, INFY expects to grow modestly faster than the industry; recall
NASSCOM estimates 16-17% industry growth in FY12 (vs. ~18% in FY11). We believe INFY's
confidence reflects its expanding customer base, its solid deal pipeline and ramp of recent signings:
four transformational deals and six 'large' deals during the quarter including some of which are over
$100M opportunities. Our revised FY12 estimate assumes 18.5% Y/Y revenue growth and our FY13
estimate assumes ~16% revenue growth.
Key Takeaways
Macro Environment: Management's commentary about the macro environment remains largely
unchanged, in our view. While the spending environment has not returned to 2005-2007 levels, project
pipelines and discretionary work continue to expand and pricing continues to moderately improve. IT
budgets are expected to remain flat to marginally up in CY11; however, offshore services should
continue to gain wallet share and post mid-to high-teen growth. We believe investments in new
services and offerings position Infosys to benefit from strong secular tailwinds.
Investment Spending: We were surprised management did not attribute a portion of the expected
margin pressure in FY12 to various internal investments that are aimed at expanding its addressable
market, its renewed focus on Innovation-related services (platforms, new models, outcome-based
models) and efforts to improve internal efficiencies. Recall management has historically believed that
these investments could cause some margin headwind near term but would drive incremental revenue
opportunity over time, and help limit the historical linear relationship between head-count and revenue
growth. Specifically, the company is investing in its Europe business (22% of total revenue), its
front-end infrastructure (hiring local talent, relationship managers), its global delivery platform outside
of India (e.g. Brazil, China, Mexico) and in new verticals (e.g. government, healthcare). Perhaps INFY
has accelerated investments during FY12 which puts a damper on margins and counterbalances its
typical margin levers.
Wage Inflation: Management reiterated prior commentary and expects a more benign wage inflation
environment in FY12 (vs. FY11). Offshore wages are expected to increase 10-12% (effective April 1)
and on-site wages are expected to increase 2-3% in FY12 (vs. a blended 12-15% increase in FY11).
Recall the combination of high utilization levels, increased employee attrition, and unexpected strong
demand created a labor imbalance for INFY and the industry in FY:11 (companies were forced to move
quickly and resort to expensive lateral hires). Management believes a more "normal" environment will
mitigate supply/demand imbalances in FY12.
Pricing/Productivity: Consistent with prior commentary, management cited a stable pricing
environment and indicated that the level of pricing renegotiations with clients has normalized. Constant
currency per capita productivity rose 2.1% Q/Q in 4Q:FY11 and rose 1.5% in FY11.
Client Trends: Infosys added 34 new clients in 4Q:FY11 (vs. 40 in 3Q: FY11) and management
highlighted 4 "transformational" deals and 6 large deal signings during the quarter. The number of
active clients increased to 620 in 4Q:FY11 (vs. 612 in 3Q:FY11). INFY had 16 $1M+ clients during the
quarter for a total of 366 (vs. 350 3Q:FY11).
North America (64% of revenue): North America posted its first sequential revenue decline in seven
quarters, which we largely attribute to the lapping of pent-up demand experienced in recent quarters.
During the quarter revenue fell -0.5% Q/Q in constant currency to $1.02B (vs. +6.9% Q/Q in 1Q:FY11,
+7.5% in 2Q:FY11 and +4.2% in 4Q:FY11). For the year, revenue rose 25% Y/Y to $3.94B (vs.
$3.16B).
Europe (22% of revenue): 4Q:FY11 Europe revenue growth decelerated and rose +1.6% Q/Q in
constant currency to $354M (vs. -0.8% Q/Q in 1Q:FY11, +15.6% Q/Q in 2Q:FY11 and +3.7% Q/Q in
3Q:FY11). For the year, revenue rose 18% Y/Y to $1.30B FY11 (vs. $1.11B FY10).
Trends by Vertical: In light of sluggish 4Q:FY11 revenue growth, constant currency revenue growth
decelerated in each of the four industry verticals. BFSI (36% of total revenue) C/C revenue fell -0.7%
Q/Q--marking the first decline in sequential revenue since 1Q:FY10--management cited particular
softness within the insurance sector (partially seasonality). Retail (14% of revenue) rose 1.0% Q/Q (vs.
+5.8% Q/Q in 3Q:FY11). Telecom (13% of revenue) remains sluggish and fell 4.8% Q/Q (vs. -3.9%
Q/Q growth in 3Q:FY11), which management largely attributes to macro issues (e.g., net neutrality),
not company/client-specific concerns. That said, management cited a solid pipeline of telecom
business and anticipates modest improvement in CY11.
Employee Utilization/Head Count: Excluding trainees, utilization fell 660bp Q/Q to 75.2% (vs. 82.7%
in 2Q:FY11 and 81.8% in 3Q:FY11) and is below management's targeted range of 77% to 81%. For
the year, utilization rose 540bp Y/Y to 79.6%--marking the highest annual utilization rate since 2005's
79.6%. On a gross basis, INFY added ~8.93K to its head count in 4Q:FY11 (vs. ~14.3K in 2Q:FY11
and ~11.1K in 3Q:FY11); net additions totaled 3.0K (vs. 7.6K in 2Q:FY11, 5.3K in 3Q:FY11). Employee
attrition on an LTM basis fell 50bp Q/Q to 17.0% (vs. 17.1% in 2Q:FY11 and 17.5% in 3Q:FY11.). The
company ended the year with 131K employees and management anticipates 45K gross employee
additions in FY12. Interestingly T.V. Mohandas Pai (director-in-charge of human resources)
surprisingly announced that he will leave the company in June 2011; he joined INFY in 1994 as the
CFO and headed up HR in 2006.
Model Update: We are reducing our FY12 EPS estimate to $2.89 (from $3.05) and introducing a FY13
estimate of $3.20 (+11% Y/Y). Our revised FY12 estimate is $0.01 above the high-end of company
guidance of $2.83-2.88 and assumes 18.5% Y/Y revenue growth to $7.16B and 260bp of margin
compression to 26.8%. Our FY13 estimate reflects 16% revenue growth to $8.3B and 70bp of margin
compression to 26.1%. Given INFY's historical conservatism and strong secular industry growth, we
suspect our estimates could prove conservative. However, we are unclear regarding the margin
trajectory during FY13.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies Limited
INFY: Reducing Estimates Largely On Margin
Disappointment
SUMMARY
INFY's FY12 revenue guidance of 18-20% growth appears reasonable although
dependent on 2Q/3Q sequential acceleration. We expected some operating margin
degradation, but the severity implicit in guidance is disappointing and hard to
reconcile, absent incremental investments. Consistent with INFY's revenue
guidance, we remain optimistic about industry demand trends heading into FY12.
We also view INFY's margin/EPS guidance as largely company-specific and not
reflective of increased competition/pricing pressure. We reduce our FY12E EPS by
5% and introduce an FY13E EPS, which suggests 11% EPS growth and assumes
further modest margin degradation. This note supplements our earlier note today.
KEY POINTS
n EPS for 4Q11 rose 18% Y/Y to $0.70 (vs. implied guidance of $0.68-0.69 and
our/Street estimate of $0.70/0.72). Revenue rose 1.1% Q/Q to $1.602B ($25M
below our estimate) although volumes declined 1.4% Q/Q. Operating margin fell
110bp Y/Y to 29.0% (vs. our 29.6% estimate) while other income was $28M
above our estimate (equivalent to $0.04/sh).
n INFY's revenue guidance of 18%-20% growth implies continued share gains for
offshore services relative to flat to moderately expanding IT-budgets in FY12.
INFY expects a more "normal" spending environment in FY12, and expects to
modestly out-pace offshore industry growth.
n FY12 revenue outlook of 18-20% Y/Y growth to $7.13-$7.25B (vs. our/Street
prior estimate of 18%/22%); EPS guidance of 8%-10% growth to $2.83-2.88 (vs.
our/Street's prior $3.05/3.27) reflects ~300bp margin pressure—100 bps for FX,
100 bps for higher wages, and 120 bps for lower utilization.
n We reduce our FY12E EPS to $2.89 (from $3.05 vs. guidance of $2.83-2.88)
and introduce a FY13E EPS of $3.20 (+11% Y/Y). Our FY12E EPS assumes
18.5% revenue growth and 260bp of margin compression; for FY13 we estimate
16% revenue growth and 70bp of margin compression.
n Following today's ~14% sell-off, the shares trade at 22x and 20x our FY12E and
FY13E EPS. While we believe secular growth trends remain intact, industry
fundamentals remain solid, and that our estimates could prove conservative.
However, we are unclear regarding the longer-term trajectory of INFY's margins.
While early in the March quarter earnings season, we believe INFY's disappointing margin/EPS
guidance is largely company-specific and not reflective of increased competition/pricing pressure.
Importantly, INFY's FY12 revenue guidance brackets our prior estimate and suggests industry demand
remains relatively robust heading into FY12. We believe INFY's revenue outlook is reasonable
although it implies sequential acceleration in 2Q and 3Q. Following today's ~14% sell-off, the shares
trade at 22x and 20x our FY12 and FY13 EPS estimates, respectively. Our FY13 EPS estimate
suggests 11% EPS growth and assumes 70 bps of further margin degradation. We are unclear if the
FY12 margin decline will set a floor for INFY going forward; essentially we are unclear regarding
INFY's longer-term margin trajectory as the natural offsets to margin pressure (pricing, organic
operating leverage, etc.) are not evident for FY12.
Results Summary: Infosys' 4Q:FY11 EPS rose 18% Y/Y to $0.70, which was in line with our estimate
(vs. guidance of $0.67-0.68 and the Street's $0.72 estimate). Other Income, which was $28M above
our estimate (or $0.04/sh) offset lower than expected revenue ($25M below our estimate) and margins
(60bp below our estimate). On the heels of 6% Q/Q revenue growth, 4Q:FY11 revenue rose +1.1%
Q/Q to $1.602B (vs. our $1.627B estimate and guidance of 1-2% Q/Q), driven by a 1.4% Q/Q drop in
volume (vs. +7% in 2Q and +3% in 3Q), which was offset by 2.1% Q/Q pricing growth (vs. 0.5% in
3Q:FY11). Operating margins fell 120bp Q/Q (-110bp Y/Y) to 29.0% (vs. our estimate of 29.6%).
INFY's tax rate rose to 27.7% (vs. 21.7% in 4Q:FY10), which pressured EPS by ~$0.06/sh Y/Y. For the
year, revenue rose 26% Y/Y to $6.04B, operating margins fell 100bp Y/Y to 29.4% and EPS rose 14%
Y/Y to $2.62; that said a higher tax rate in FY11 pressured EPS by $0.19 (pre-tax income rose 23%
Y/Y).
Guidance: FY12 guidance was disappointing. Revenue was in line with our estimate; however, the
midpoint for EPS was 6% below our estimate and 13% below the Street consensus—due to lower than
expected margins. On the heels of 26% Y/Y revenue growth, FY12 revenue is slated to grow 18-20%
Y/Y to $7.13-$7.25B (vs. our/Street prior growth estimate of 18%/22%). After 14% Y/Y EPS growth in
FY11, FY12 EPS guidance calls for 8-10% growth to $2.83-2.88 (vs. our/Street's $3.05/3.27) and
assumes a 26-27% tax rate (vs. 26.7% in FY11). Unfortunately, operating margins are expected to fall
~300bp Y/Y (our prior estimate called for a 60bp Y/Y decline to 29.0%). Management attributes the
margin pressure to FX (~100bp), wage inflation (~100bp) and lower utilization (~120bp). Guidance
assumes an average rupee rate of 44.5 in FY12 (vs. 45.54 in FY11), wages increase in India of
10-12% (2-3% on-site) and that pricing remains flat with 4Q:FY11 levels. While we anticipate margins
will remain pressured in FY12, we suspect INFY has several levers (pricing, organic operating
leverage) to mitigate margin pressure throughout the year. Guidance for 1Q:FY12 implies 2.6%-3.6%
Q/Q revenue growth (vs. our prior estimate of 3.5%) and EPS of $0.62-0.63 (vs. our/Street's prior
estimate of $0.70/0.71).
While 4Q:FY11 volume trends were disappointing and the FY12 margin outlook was well below
our/consensus expectations, INFY has historically provided conservative guidance. Consistent with
prior commentary and guidance, INFY expects to grow modestly faster than the industry; recall
NASSCOM estimates 16-17% industry growth in FY12 (vs. ~18% in FY11). We believe INFY's
confidence reflects its expanding customer base, its solid deal pipeline and ramp of recent signings:
four transformational deals and six 'large' deals during the quarter including some of which are over
$100M opportunities. Our revised FY12 estimate assumes 18.5% Y/Y revenue growth and our FY13
estimate assumes ~16% revenue growth.
Key Takeaways
Macro Environment: Management's commentary about the macro environment remains largely
unchanged, in our view. While the spending environment has not returned to 2005-2007 levels, project
pipelines and discretionary work continue to expand and pricing continues to moderately improve. IT
budgets are expected to remain flat to marginally up in CY11; however, offshore services should
continue to gain wallet share and post mid-to high-teen growth. We believe investments in new
services and offerings position Infosys to benefit from strong secular tailwinds.
Investment Spending: We were surprised management did not attribute a portion of the expected
margin pressure in FY12 to various internal investments that are aimed at expanding its addressable
market, its renewed focus on Innovation-related services (platforms, new models, outcome-based
models) and efforts to improve internal efficiencies. Recall management has historically believed that
these investments could cause some margin headwind near term but would drive incremental revenue
opportunity over time, and help limit the historical linear relationship between head-count and revenue
growth. Specifically, the company is investing in its Europe business (22% of total revenue), its
front-end infrastructure (hiring local talent, relationship managers), its global delivery platform outside
of India (e.g. Brazil, China, Mexico) and in new verticals (e.g. government, healthcare). Perhaps INFY
has accelerated investments during FY12 which puts a damper on margins and counterbalances its
typical margin levers.
Wage Inflation: Management reiterated prior commentary and expects a more benign wage inflation
environment in FY12 (vs. FY11). Offshore wages are expected to increase 10-12% (effective April 1)
and on-site wages are expected to increase 2-3% in FY12 (vs. a blended 12-15% increase in FY11).
Recall the combination of high utilization levels, increased employee attrition, and unexpected strong
demand created a labor imbalance for INFY and the industry in FY:11 (companies were forced to move
quickly and resort to expensive lateral hires). Management believes a more "normal" environment will
mitigate supply/demand imbalances in FY12.
Pricing/Productivity: Consistent with prior commentary, management cited a stable pricing
environment and indicated that the level of pricing renegotiations with clients has normalized. Constant
currency per capita productivity rose 2.1% Q/Q in 4Q:FY11 and rose 1.5% in FY11.
Client Trends: Infosys added 34 new clients in 4Q:FY11 (vs. 40 in 3Q: FY11) and management
highlighted 4 "transformational" deals and 6 large deal signings during the quarter. The number of
active clients increased to 620 in 4Q:FY11 (vs. 612 in 3Q:FY11). INFY had 16 $1M+ clients during the
quarter for a total of 366 (vs. 350 3Q:FY11).
North America (64% of revenue): North America posted its first sequential revenue decline in seven
quarters, which we largely attribute to the lapping of pent-up demand experienced in recent quarters.
During the quarter revenue fell -0.5% Q/Q in constant currency to $1.02B (vs. +6.9% Q/Q in 1Q:FY11,
+7.5% in 2Q:FY11 and +4.2% in 4Q:FY11). For the year, revenue rose 25% Y/Y to $3.94B (vs.
$3.16B).
Europe (22% of revenue): 4Q:FY11 Europe revenue growth decelerated and rose +1.6% Q/Q in
constant currency to $354M (vs. -0.8% Q/Q in 1Q:FY11, +15.6% Q/Q in 2Q:FY11 and +3.7% Q/Q in
3Q:FY11). For the year, revenue rose 18% Y/Y to $1.30B FY11 (vs. $1.11B FY10).
Trends by Vertical: In light of sluggish 4Q:FY11 revenue growth, constant currency revenue growth
decelerated in each of the four industry verticals. BFSI (36% of total revenue) C/C revenue fell -0.7%
Q/Q--marking the first decline in sequential revenue since 1Q:FY10--management cited particular
softness within the insurance sector (partially seasonality). Retail (14% of revenue) rose 1.0% Q/Q (vs.
+5.8% Q/Q in 3Q:FY11). Telecom (13% of revenue) remains sluggish and fell 4.8% Q/Q (vs. -3.9%
Q/Q growth in 3Q:FY11), which management largely attributes to macro issues (e.g., net neutrality),
not company/client-specific concerns. That said, management cited a solid pipeline of telecom
business and anticipates modest improvement in CY11.
Employee Utilization/Head Count: Excluding trainees, utilization fell 660bp Q/Q to 75.2% (vs. 82.7%
in 2Q:FY11 and 81.8% in 3Q:FY11) and is below management's targeted range of 77% to 81%. For
the year, utilization rose 540bp Y/Y to 79.6%--marking the highest annual utilization rate since 2005's
79.6%. On a gross basis, INFY added ~8.93K to its head count in 4Q:FY11 (vs. ~14.3K in 2Q:FY11
and ~11.1K in 3Q:FY11); net additions totaled 3.0K (vs. 7.6K in 2Q:FY11, 5.3K in 3Q:FY11). Employee
attrition on an LTM basis fell 50bp Q/Q to 17.0% (vs. 17.1% in 2Q:FY11 and 17.5% in 3Q:FY11.). The
company ended the year with 131K employees and management anticipates 45K gross employee
additions in FY12. Interestingly T.V. Mohandas Pai (director-in-charge of human resources)
surprisingly announced that he will leave the company in June 2011; he joined INFY in 1994 as the
CFO and headed up HR in 2006.
Model Update: We are reducing our FY12 EPS estimate to $2.89 (from $3.05) and introducing a FY13
estimate of $3.20 (+11% Y/Y). Our revised FY12 estimate is $0.01 above the high-end of company
guidance of $2.83-2.88 and assumes 18.5% Y/Y revenue growth to $7.16B and 260bp of margin
compression to 26.8%. Our FY13 estimate reflects 16% revenue growth to $8.3B and 70bp of margin
compression to 26.1%. Given INFY's historical conservatism and strong secular industry growth, we
suspect our estimates could prove conservative. However, we are unclear regarding the margin
trajectory during FY13.
No comments:
Post a Comment