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Infosys Technologies------------------------------------------------------- Downgrade to NEUTRAL
New report: Bellwether facing significant issues
● Infosys reported disappointing Mar 2011 results. Topline growth
was 3% below estimates (USD terms) and margins dropped 120
bp QoQ versus our expectation of a 40 bp drop. EPS was in line,
largely due to higher other income.
● While Infosys’ USD-revenue growth guidance of 18-20% in FY12
was as anticipated, guidance of a 300 bp decline in margins
surprised us. We note that this could make it the third consecutive
year when Infosys would underperform peers such as TCS on
margins.
● Weak quarterly performance and poor margin guidance force us
to bring down our EPS estimates for FY3/12 and FY3/13 by 12%
and 16%, respectively. Our DCF-based target price is Rs3,400
(earlier Rs4,050). We downgrade the stock to NEUTRAL.
● We also believe that the shares lack any triggers in the near term
and hence could be range-bound. In this period, we would look to
be more aggressive on the stock at a price below Rs2,800.
Weak results
Infosys reported weak Mar 2011 results with both revenue growth and
margins significantly below estimates. Revenue grew 2% QoQ to
Rs72,500 mn—3% below our estimates. Growth was just 1% QoQ in
USD terms, barely meeting its own guidance of 1-2% QoQ growth.
EBIT margin dropped 120 bp QoQ to 29%. As a result, EBIT was 6%
below our expectations. Significantly higher other income led to PAT
coming in line with estimates, growing 2% QoQ to Rs18,180 mn.
Miss due to seasonality, delayed project starts
Volumes declined 1.4% QoQ. Management explained that this was
due to seasonality and delayed project starts from some clients. Also,
the company hired 8,930 employees against its target of 5,800. The
resulting fall in utilisation hurt margins.
In line revenue, disappointing EPS guidance
Infosys’ USD-revenue growth guidance of 18-20% in FY12 was as per
our expectation. However, management guided for FY12 EPS growth
of only 6-7% YoY to Rs126-128 (we expected guidance of Rs140-144).
This implies a 300 bp YoY decline in margins.
Management explained this as: (1) 100 bp due to a stronger INR, (2)
120-130 bp due to lower utilisation, as management wants to build
capacity ahead of demand, and (3) 70-80 bp due to wage hikes—10-
12% offshore and 2-3% onsite, similar to the increase in FY11.
Expect management change to be disruptive
We note that this would also be a year of management change in
Infosys. While this company has seen management changes earlier,
we believe that the change this time would be more disruptive.
We believe that it is likely that the current COO Mr Shibulal, becomes
the CEO of the company in the current reorganisation. However, after
that the next CEO would have to come from one of the current
business heads rather than one of the founders of the company. This
could lead to some distractions and could have a short-term impact on
the business.
Downgrade to NEUTRAL, reduce target price
Infosys margin performance has remained weak compared to peers
such as Tata Consultancy over the past two years. Guidance implies
that this year could see further weakness in margins. Compared to our
earlier estimates of flat margins, we now build a margin decline in our
estimates. We also reduce our revenue growth estimates on the back
of weak performance in the quarter.
As a result, our EPS estimates for FY3/12 and FY3/13 drop by 12%
and 16%, respectively. Our DCF-based target price drops to Rs3,400
from Rs4,050. We downgrade the stock to NEUTRAL. We would look
to be more aggressive on the stock at a price below Rs2,800.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies------------------------------------------------------- Downgrade to NEUTRAL
New report: Bellwether facing significant issues
● Infosys reported disappointing Mar 2011 results. Topline growth
was 3% below estimates (USD terms) and margins dropped 120
bp QoQ versus our expectation of a 40 bp drop. EPS was in line,
largely due to higher other income.
● While Infosys’ USD-revenue growth guidance of 18-20% in FY12
was as anticipated, guidance of a 300 bp decline in margins
surprised us. We note that this could make it the third consecutive
year when Infosys would underperform peers such as TCS on
margins.
● Weak quarterly performance and poor margin guidance force us
to bring down our EPS estimates for FY3/12 and FY3/13 by 12%
and 16%, respectively. Our DCF-based target price is Rs3,400
(earlier Rs4,050). We downgrade the stock to NEUTRAL.
● We also believe that the shares lack any triggers in the near term
and hence could be range-bound. In this period, we would look to
be more aggressive on the stock at a price below Rs2,800.
Weak results
Infosys reported weak Mar 2011 results with both revenue growth and
margins significantly below estimates. Revenue grew 2% QoQ to
Rs72,500 mn—3% below our estimates. Growth was just 1% QoQ in
USD terms, barely meeting its own guidance of 1-2% QoQ growth.
EBIT margin dropped 120 bp QoQ to 29%. As a result, EBIT was 6%
below our expectations. Significantly higher other income led to PAT
coming in line with estimates, growing 2% QoQ to Rs18,180 mn.
Miss due to seasonality, delayed project starts
Volumes declined 1.4% QoQ. Management explained that this was
due to seasonality and delayed project starts from some clients. Also,
the company hired 8,930 employees against its target of 5,800. The
resulting fall in utilisation hurt margins.
In line revenue, disappointing EPS guidance
Infosys’ USD-revenue growth guidance of 18-20% in FY12 was as per
our expectation. However, management guided for FY12 EPS growth
of only 6-7% YoY to Rs126-128 (we expected guidance of Rs140-144).
This implies a 300 bp YoY decline in margins.
Management explained this as: (1) 100 bp due to a stronger INR, (2)
120-130 bp due to lower utilisation, as management wants to build
capacity ahead of demand, and (3) 70-80 bp due to wage hikes—10-
12% offshore and 2-3% onsite, similar to the increase in FY11.
Expect management change to be disruptive
We note that this would also be a year of management change in
Infosys. While this company has seen management changes earlier,
we believe that the change this time would be more disruptive.
We believe that it is likely that the current COO Mr Shibulal, becomes
the CEO of the company in the current reorganisation. However, after
that the next CEO would have to come from one of the current
business heads rather than one of the founders of the company. This
could lead to some distractions and could have a short-term impact on
the business.
Downgrade to NEUTRAL, reduce target price
Infosys margin performance has remained weak compared to peers
such as Tata Consultancy over the past two years. Guidance implies
that this year could see further weakness in margins. Compared to our
earlier estimates of flat margins, we now build a margin decline in our
estimates. We also reduce our revenue growth estimates on the back
of weak performance in the quarter.
As a result, our EPS estimates for FY3/12 and FY3/13 drop by 12%
and 16%, respectively. Our DCF-based target price drops to Rs3,400
from Rs4,050. We downgrade the stock to NEUTRAL. We would look
to be more aggressive on the stock at a price below Rs2,800.
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