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Infosys Technologies (INFY.BO)
Disappointing 4Q; Weak FY12 Guidance
FY12 EPS Guidance implies ~6-7% yoy growth… — Revenue guidance of ~18-20%
yoy was in line with expectations (see our note on buy-side expectations: Infosys
Technologies (INFY.BO) - FY12 Guidance – What Does Buy Side Expect? however,
margin decline of ~250-300bps yoy was meaningfully below expectations. EPS
guidance of Rs126-128 is significantly lower than expectations of ~Rs138-140.
...Comes on the back of a weak 4Q — 4Q was weak on most counts – volumes
declined ~1.4% qoq and the company missed the lower end of revenue guidance in
constant currency terms. Management attributed it to seasonality but it looks weaker
than in the past few years. The weakness was across the board although some
segments like Insurance and Telecom were more impacted. Also, a particular client
segment (clients 6-10) was more impacted with ~7% decline qoq.
Other key highlights — (a) Management attributed the weakness to seasonality and
indicated that weakness was across the board. (b) Pricing improvement of ~2%
(constant currency) was one of the positive takeaways from the quarter. (c) Hiring
guidance of ~45k gross adds for FY12. (d) Infosys won 6 large deals in the quarter.
Downside risk to our/consensus estimates — (a) Most analysts (including us) were
building in ~25%+ revenue growth for FY12. If one assumes ~6% growth in Q1, then
the company needs to deliver ~7% qoq over Q2-Q4 to achieve 25% growth – difficult
given Q3/Q4 are seasonally weak (b) Consensus was pricing in flat EBITDA margins
yoy – margin assumptions may come down a little.
What does it mean for the stock/sector? — Infosys has lagged peers in the recent
past – leading to a relative de-rating. 4Q results are weak – TCS/CTSH/Wipro
performance will be the key to watch out for. Infosys’ succession plan (board meets on
April 30th) and change in responsibilities/structure will be another investor focus area.
On the sector, lots of positives are priced in; today’s guidance also bring margin risks to
the forefront – our neutral view remains.
Key Highlights
Revenues were $1,602m, up ~1% qoq (CIRA expectations: $1,648m).
EBITDA margin of 32.0% (CIRA expectations: 33.2%), down ~130bps
sequentially. This was primarily on account of lower utilization and volume
decline despite INR depreciation and pricing improvements.
Net profit of Rs18.2b vs. our expectations of Rs18.8b – lower due to lower top
line and margins despite higher than expected other income.
Constant currency realizations improved on a blended basis by 2.1% qoq.
IT volumes were down 1.4% sequentially on a blended basis – offshore volumes
decreased 2.0% qoq while onsite volumes were flattish qoq.
Headcount increased by 3,041 employees on a net basis. Hiring guidance for
FY12 is ~45,000 employees (gross).
Growth was led by Manufacturing and Banking & Financial Services where
revenues increased by 5.2% and 3.6% qoq respectively. Telecom was down
3.8% qoq while Insurance was down 13.4%.
In terms of Service lines, growth was led by Application Development at 4.3%
qoq while Application Maintenance, Testing and Consulting & PI were down
1.2%, 2.9% and 0.9% qoq respectively.
North America had a decline of 0.5% qoq while Europe grew 2.5% (some help
from cross currency though).
BPO subsidiary had revenue decline of ~2% qoq; net margins expanded further
to ~17% (~15% in 3Q).
Top-10 clients declined ~2% qoq while clients outside this bucket grew ~2%.
Attrition decreased by ~50bps on a LTM basis.
Infosys Technologies
Company description
Infosys is the second-largest Indian IT services company with more than 125,000
professionals, and is a leader in the offshore services space. Infosys provides
business consulting, application development & maintenance and engineering
services to ~610 clients across verticals such as Banking, Financial Services,
Insurance, Retail, Manufacturing and Utilities in the Americas, Europe and Asia
Pacific. Infosys also sells a core banking application, Finacle, which is used by
leading banks in India, the Middle East, Africa and Europe. Its subsidiary, Infosys
BPO, which employs ~18,000 people, is a provider of BPO services.
Investment strategy
We rate Infosys shares as Hold/Low Risk (2L). We are positive on the company's
fundamentals. Offshore IT outsourcing has become a mainstream option, and we
think that scale and scalability, along with an ability to move up the value chain, are
key criteria for successful offshore vendors. In this respect, Infosys appears well
positioned and continues to gain ground given its strong branding and industryleading
sales force. We expect Infosys to deliver a revenue CAGR of ~24% ($
terms) and an earnings CAGR of ~17% for FY10-13E. Unlike other high-growth
firms in other industries, Infosys continues to generate solid FCF and its RoE of
~30% remains well above its cost of capital.
Valuation
Our Rs3,430 target price for Infosys is based on 22x Jun'12E EPS. This is close to
the higher end of the last 3-year trading band of 10-24x 12-month forward earnings
and factors in marginal deceleration in growth. Our estimates continue to assume a
certain PE premium to the market; this is justified, in our view, given the strong FCF
and ROIC for Infosys vs. the overall market. We believe PE remains the most
appropriate valuation measure given Infosys' profitability record and higher earnings
visibility.
Risks
We rate Infosys Low Risk which is in line with our quantitative risk-rating system,
which tracks 260-day historical share price volatility. Key downside risks to our
target price include: (1) any significant appreciation of the rupee against the
USD/EUR/GBP; (2) pressure on billing rates (as the company continues to enjoy a
premium in its billing rates); and (3) a prolonged slowdown in the US economy. Key
upside risks that could cause shares to exceed our target price include: (1) a sharp
recovery in the US/Global economy; and (2) any significant depreciation of the
rupee against the USD/EUR/GBP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFY.BO)
Disappointing 4Q; Weak FY12 Guidance
FY12 EPS Guidance implies ~6-7% yoy growth… — Revenue guidance of ~18-20%
yoy was in line with expectations (see our note on buy-side expectations: Infosys
Technologies (INFY.BO) - FY12 Guidance – What Does Buy Side Expect? however,
margin decline of ~250-300bps yoy was meaningfully below expectations. EPS
guidance of Rs126-128 is significantly lower than expectations of ~Rs138-140.
...Comes on the back of a weak 4Q — 4Q was weak on most counts – volumes
declined ~1.4% qoq and the company missed the lower end of revenue guidance in
constant currency terms. Management attributed it to seasonality but it looks weaker
than in the past few years. The weakness was across the board although some
segments like Insurance and Telecom were more impacted. Also, a particular client
segment (clients 6-10) was more impacted with ~7% decline qoq.
Other key highlights — (a) Management attributed the weakness to seasonality and
indicated that weakness was across the board. (b) Pricing improvement of ~2%
(constant currency) was one of the positive takeaways from the quarter. (c) Hiring
guidance of ~45k gross adds for FY12. (d) Infosys won 6 large deals in the quarter.
Downside risk to our/consensus estimates — (a) Most analysts (including us) were
building in ~25%+ revenue growth for FY12. If one assumes ~6% growth in Q1, then
the company needs to deliver ~7% qoq over Q2-Q4 to achieve 25% growth – difficult
given Q3/Q4 are seasonally weak (b) Consensus was pricing in flat EBITDA margins
yoy – margin assumptions may come down a little.
What does it mean for the stock/sector? — Infosys has lagged peers in the recent
past – leading to a relative de-rating. 4Q results are weak – TCS/CTSH/Wipro
performance will be the key to watch out for. Infosys’ succession plan (board meets on
April 30th) and change in responsibilities/structure will be another investor focus area.
On the sector, lots of positives are priced in; today’s guidance also bring margin risks to
the forefront – our neutral view remains.
Key Highlights
Revenues were $1,602m, up ~1% qoq (CIRA expectations: $1,648m).
EBITDA margin of 32.0% (CIRA expectations: 33.2%), down ~130bps
sequentially. This was primarily on account of lower utilization and volume
decline despite INR depreciation and pricing improvements.
Net profit of Rs18.2b vs. our expectations of Rs18.8b – lower due to lower top
line and margins despite higher than expected other income.
Constant currency realizations improved on a blended basis by 2.1% qoq.
IT volumes were down 1.4% sequentially on a blended basis – offshore volumes
decreased 2.0% qoq while onsite volumes were flattish qoq.
Headcount increased by 3,041 employees on a net basis. Hiring guidance for
FY12 is ~45,000 employees (gross).
Growth was led by Manufacturing and Banking & Financial Services where
revenues increased by 5.2% and 3.6% qoq respectively. Telecom was down
3.8% qoq while Insurance was down 13.4%.
In terms of Service lines, growth was led by Application Development at 4.3%
qoq while Application Maintenance, Testing and Consulting & PI were down
1.2%, 2.9% and 0.9% qoq respectively.
North America had a decline of 0.5% qoq while Europe grew 2.5% (some help
from cross currency though).
BPO subsidiary had revenue decline of ~2% qoq; net margins expanded further
to ~17% (~15% in 3Q).
Top-10 clients declined ~2% qoq while clients outside this bucket grew ~2%.
Attrition decreased by ~50bps on a LTM basis.
Infosys Technologies
Company description
Infosys is the second-largest Indian IT services company with more than 125,000
professionals, and is a leader in the offshore services space. Infosys provides
business consulting, application development & maintenance and engineering
services to ~610 clients across verticals such as Banking, Financial Services,
Insurance, Retail, Manufacturing and Utilities in the Americas, Europe and Asia
Pacific. Infosys also sells a core banking application, Finacle, which is used by
leading banks in India, the Middle East, Africa and Europe. Its subsidiary, Infosys
BPO, which employs ~18,000 people, is a provider of BPO services.
Investment strategy
We rate Infosys shares as Hold/Low Risk (2L). We are positive on the company's
fundamentals. Offshore IT outsourcing has become a mainstream option, and we
think that scale and scalability, along with an ability to move up the value chain, are
key criteria for successful offshore vendors. In this respect, Infosys appears well
positioned and continues to gain ground given its strong branding and industryleading
sales force. We expect Infosys to deliver a revenue CAGR of ~24% ($
terms) and an earnings CAGR of ~17% for FY10-13E. Unlike other high-growth
firms in other industries, Infosys continues to generate solid FCF and its RoE of
~30% remains well above its cost of capital.
Valuation
Our Rs3,430 target price for Infosys is based on 22x Jun'12E EPS. This is close to
the higher end of the last 3-year trading band of 10-24x 12-month forward earnings
and factors in marginal deceleration in growth. Our estimates continue to assume a
certain PE premium to the market; this is justified, in our view, given the strong FCF
and ROIC for Infosys vs. the overall market. We believe PE remains the most
appropriate valuation measure given Infosys' profitability record and higher earnings
visibility.
Risks
We rate Infosys Low Risk which is in line with our quantitative risk-rating system,
which tracks 260-day historical share price volatility. Key downside risks to our
target price include: (1) any significant appreciation of the rupee against the
USD/EUR/GBP; (2) pressure on billing rates (as the company continues to enjoy a
premium in its billing rates); and (3) a prolonged slowdown in the US economy. Key
upside risks that could cause shares to exceed our target price include: (1) a sharp
recovery in the US/Global economy; and (2) any significant depreciation of the
rupee against the USD/EUR/GBP.
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