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Infosys Technologies (INFY.BO)
FY12 Guidance – What Does Buy Side Expect?
“Buy Side” expectations — We conducted a small survey with investors to find their
expectations for Infosys’ FY12 guidance and actual delivery. It had simple questions
on: (1) $-term revenue growth (2) Margins (3) EPS. Our poll suggests the guidance
expectations at $-term revenue growth of ~18%, margin fall of ~150bps and EPS of
~Rs138, while the actual number is expected to be $-term revenue growth of ~26%,
margin fall of ~50bps and EPS of ~Rs148.
Guidance – what history suggests — (1) Over FY06-10, Infosys outperformed its
guidance by ~4% at the upper end. (2) Cognizant’s guidance (the only other tier-I
company to give annual guidance) has been ~12% higher than Infosys’ over FY06-11.
Our thoughts on Infosys guidance are in the note Indian IT Services - Infosys FY12
Guidance – Next Key Data Point for Indian IT. Given the sharp appreciation in INR over
the last few days, there may be some risk to the margins/EPS guidance.
“Sell Side” expectations — Consensus estimates for Infosys’ FY12 are $-term
revenue growth of ~26%, flattish margin and EPS of ~Rs150. However, these are
expectations of what Infosys will deliver and not what the guidance is likely to be.
Where is the risk? — Revenue expectations do look reasonable; we believe that the
margin guidance could be a risk factor. Assuming Infosys guides at Rs44.5/$, there will
be ~100bps margin headwind due to currency alone. In addition, there will be a
headwind of ~200-300bps due to salary hikes and further headwinds due to
investments, which will have to be mitigated by pricing and other margin levers.
Sector view: Neutral — We believe that EPS guidance of ~Rs138 is unlikely to be a
positive catalyst for the stock/sector – particularly given the recent INR appreciation,
wage pressures and increased investments in the business that the company is talking
about. Unless the guidance surprises positively, the sector could drift down. Infosys
reports on April 15th .We continue to like HCLT and Wipro on a relative basis
FY12 Guidance – What Do Investors Expect?
With Infosys Q4FY11 results round the corner, the focus has once again shifted to the guidance for
FY12. The question in investors’ minds is: What could be the possible range of revenues, margins
and EPS that the company could guide to?
While sell side expectations are widely documented, we thought it would be interesting to
understand the buy side expectations and to analyze the gap, if any. With that intention, we
conducted a small survey among investors and present our key findings in this report.
Conducted survey among investors
We conducted a small survey among investors to understand their expectations for
Infosys’ FY12 guidance as well as their expectations of actual delivery. The format
was brief with just 3 questions – details follow in this report. We got 18 responses –
though this is not statistically sufficient (as it is less than 30), it does give an idea of
the mood of investors in general.
Guidance Expectations
For the purpose of our calculations, we have taken the mid-point of the range given
by investors and then a simple mean/median of all the numbers thus obtained.
Q1: $-term revenue growth?
Our first question was: What could be the range for $-term revenue growth
guidance? Based on the results of our poll, investors on an average expect ~18% $-
term revenue growth guidance from Infosys (the median is ~18%).
Q2: Margin guidance?
Our second question was: What could be the range for the margin guidance? This
was primarily to account for currency appreciation, wage hikes and increased
investments in the business given the improvement in the macro. Based on the
results of our poll, investors on an average expect a fall of ~115bps in margin
guidance from Infosys (the median is a fall of 150bps).
Q3: Rupee EPS guidance range?
Our final question was: Assuming the prevalent exchange rates, what could be the
range of rupee EPS guidance? Our poll suggests that the investor expectation for
Infosys’ FY12 EPS guidance, on an average, is ~Rs139 (the median is ~Rs138).
Expectations of Actual Delivery
Infosys management's conservatism is well known. With that backdrop, we decided
to check what investors were thinking about the actual numbers that Infosys could
possibly deliver in FY12.
For the purpose of our calculations, we have taken the mid-point of the range given
by investors and then a simple mean/median of all the numbers thus obtained.
Q1: $-term revenue growth?
Our first question was: What could be the range for $-term revenue growth? Based
on the results of our poll, investors on an average expect ~24% $-term revenue
growth from Infosys (the median is ~26%).
Q2: Margins?
Our second question was: What could be the range for margins? This was primarily
to account for the currency appreciation, wage hikes and increased investments in
the business given the improvement in the macro. Based on the results of our poll,
investors on an average expect a fall of ~30bps in margins (the median is ~50bps).
Q3: Rupee EPS?
Our final question in the poll was: Assuming the prevalent exchange rates, what
could be the range of rupee EPS? Our poll suggests that the investor expectation
for Infosys’ EPS, on an average, is ~Rs148 (the median is also ~Rs148).
Sell side expectations
As per Bloomberg, consensus estimate (median) for Infosys’ FY12 $-term revenue
growth is ~26% (assuming that analysts would have assumed ~Rs44.5 in their
models and INR growth is ~23%), the margin is expected to be flattish while the
EPS is ~Rs150.
Interesting difference between Indian and US Sell side
Interestingly, the Indian Sell side analysts are forecasting ~26% revenue growth and
~24% EPS growth. US Sell side is forecasting ~20% revenue growth and ~18%
EPS growth, which is much lower.
History – Actuals Vs Guidance
Over FY06-10, Infosys consistently outperformed its annual guidance (the original
guidance given with the Q4 results). The average beat was ~4% at the upper end
which includes a ~9% miss in FY09 due to the cross currency headwinds and the
deteriorating macro – highlighting the conservative nature of the management
Guidance comparison with Cognizant
Cognizant’s annual guidance (the original guidance given with the Q4 results), on
an average, has been ~12% higher than Infosys’ higher end of guidance over FY06-
11. For CY11, Cognizant has guided for “at least” 26% revenue growth.
Stock performance pre-and-post guidance
We have looked at the Infosys stock performance both pre and post the guidance
dates (for simplicity, we focused on 1-week and 1-month performances). As the data
below shows, there is no discernible pattern.
Our View
Our view, as far as the $-term revenue growth guidance is concerned, is that
Infosys will guide to revenue growth of ~17-20% yoy. In terms of our model, we are
factoring in revenue growth of ~26% yoy ($-term) and EPS of ~Rs150 for FY12
(currency assumption Rs44.5/$).
We believe that ~14% EPS growth (as implied in the guidance) is unlikely to be a
catalyst – particularly given the recent INR appreciation, wage pressures and
increased investments in the business that the company is talking about.
Infosys Technologies
Company description
Infosys is the second-largest Indian IT services company with more than 125,000
professionals, and is a leader in the offshore services space. Infosys provides
business consulting, application development & maintenance and engineering
services to ~610 clients across verticals such as Banking, Financial Services,
Insurance, Retail, Manufacturing and Utilities in the Americas, Europe and Asia
Pacific. Infosys also sells a core banking application, Finacle, which is used by
leading banks in India, the Middle East, Africa and Europe. Its subsidiary, Infosys
BPO, which employs ~18,000 people, is a provider of BPO services.
Investment strategy
We rate Infosys shares as Hold/Low Risk (2L). We are positive on the company's
fundamentals. Offshore IT outsourcing has become a mainstream option, and we
think that scale and scalability, along with an ability to move up the value chain, are
key criteria for successful offshore vendors. In this respect, Infosys appears well
positioned and continues to gain ground given its strong branding and industryleading sales force. We expect Infosys to deliver a revenue CAGR of ~24% ($
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.
HCL Technologies
(HCLT.BO; Rs487.95; 1L)
Valuation: Our target price is Rs560 based on 18x Jun 12E EPS. This is higher
than the mid-point of the 5-20x band that the stock has traded in over the past three
years. We believe a higher multiple is justified given improving macro and potential
benefits arising out of the Axon acquisition. We believe PE remains the most
appropriate valuation measure given HCLT's profitable track record.
Risks: We rate HCLT shares Low Risk which is inline with our quantitative riskrating system as the company has significant scale, enjoys a good brand name and
continues to generate significant FCF. Key downside risks that could impede the
stock from reaching our target price include: (1) any significant appreciation of the
rupee against the USD/EUR/GBP; (2) a sharp slowdown in the US/Global economy;
(3) acquisition-related risks; and (4) the strategy of pursuing large deals could have
negative margin implications.
Wipro
(WIPR.BO; Rs462.00; 1L)
Valuation: Our target price of Rs515 is based on 20x Jun'12E EPS. Our target
multiple is derived from a PE-band analysis of Wipro's historical trading pattern and
peer group valuations. Wipro has traded at 6-22x over the past three years. Given
that revenue visibility is improving with business environment stabilizing, we believe
Wipro should trade higher than the mid-point of the band. We think Wipro will
continue to trade at a discount to Infosys. PE is the most appropriate valuation
measure, in our view, given Wipro's profitability and earnings visibility.
Risks: We rate Wipro Low Risk which is inline with our quantitative risk-rating
system, which tracks 260-day historical share price volatility. Key downside risks
that could cause shares to fall below our target price include: (1) an extended
slowdown in the US/Global economy; and (2) any significant appreciation 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)
FY12 Guidance – What Does Buy Side Expect?
“Buy Side” expectations — We conducted a small survey with investors to find their
expectations for Infosys’ FY12 guidance and actual delivery. It had simple questions
on: (1) $-term revenue growth (2) Margins (3) EPS. Our poll suggests the guidance
expectations at $-term revenue growth of ~18%, margin fall of ~150bps and EPS of
~Rs138, while the actual number is expected to be $-term revenue growth of ~26%,
margin fall of ~50bps and EPS of ~Rs148.
Guidance – what history suggests — (1) Over FY06-10, Infosys outperformed its
guidance by ~4% at the upper end. (2) Cognizant’s guidance (the only other tier-I
company to give annual guidance) has been ~12% higher than Infosys’ over FY06-11.
Our thoughts on Infosys guidance are in the note Indian IT Services - Infosys FY12
Guidance – Next Key Data Point for Indian IT. Given the sharp appreciation in INR over
the last few days, there may be some risk to the margins/EPS guidance.
“Sell Side” expectations — Consensus estimates for Infosys’ FY12 are $-term
revenue growth of ~26%, flattish margin and EPS of ~Rs150. However, these are
expectations of what Infosys will deliver and not what the guidance is likely to be.
Where is the risk? — Revenue expectations do look reasonable; we believe that the
margin guidance could be a risk factor. Assuming Infosys guides at Rs44.5/$, there will
be ~100bps margin headwind due to currency alone. In addition, there will be a
headwind of ~200-300bps due to salary hikes and further headwinds due to
investments, which will have to be mitigated by pricing and other margin levers.
Sector view: Neutral — We believe that EPS guidance of ~Rs138 is unlikely to be a
positive catalyst for the stock/sector – particularly given the recent INR appreciation,
wage pressures and increased investments in the business that the company is talking
about. Unless the guidance surprises positively, the sector could drift down. Infosys
reports on April 15th .We continue to like HCLT and Wipro on a relative basis
With Infosys Q4FY11 results round the corner, the focus has once again shifted to the guidance for
FY12. The question in investors’ minds is: What could be the possible range of revenues, margins
and EPS that the company could guide to?
While sell side expectations are widely documented, we thought it would be interesting to
understand the buy side expectations and to analyze the gap, if any. With that intention, we
conducted a small survey among investors and present our key findings in this report.
Conducted survey among investors
We conducted a small survey among investors to understand their expectations for
Infosys’ FY12 guidance as well as their expectations of actual delivery. The format
was brief with just 3 questions – details follow in this report. We got 18 responses –
though this is not statistically sufficient (as it is less than 30), it does give an idea of
the mood of investors in general.
Guidance Expectations
For the purpose of our calculations, we have taken the mid-point of the range given
by investors and then a simple mean/median of all the numbers thus obtained.
Q1: $-term revenue growth?
Our first question was: What could be the range for $-term revenue growth
guidance? Based on the results of our poll, investors on an average expect ~18% $-
term revenue growth guidance from Infosys (the median is ~18%).
Q2: Margin guidance?
Our second question was: What could be the range for the margin guidance? This
was primarily to account for currency appreciation, wage hikes and increased
investments in the business given the improvement in the macro. Based on the
results of our poll, investors on an average expect a fall of ~115bps in margin
guidance from Infosys (the median is a fall of 150bps).
Q3: Rupee EPS guidance range?
Our final question was: Assuming the prevalent exchange rates, what could be the
range of rupee EPS guidance? Our poll suggests that the investor expectation for
Infosys’ FY12 EPS guidance, on an average, is ~Rs139 (the median is ~Rs138).
Expectations of Actual Delivery
Infosys management's conservatism is well known. With that backdrop, we decided
to check what investors were thinking about the actual numbers that Infosys could
possibly deliver in FY12.
For the purpose of our calculations, we have taken the mid-point of the range given
by investors and then a simple mean/median of all the numbers thus obtained.
Q1: $-term revenue growth?
Our first question was: What could be the range for $-term revenue growth? Based
on the results of our poll, investors on an average expect ~24% $-term revenue
growth from Infosys (the median is ~26%).
Q2: Margins?
Our second question was: What could be the range for margins? This was primarily
to account for the currency appreciation, wage hikes and increased investments in
the business given the improvement in the macro. Based on the results of our poll,
investors on an average expect a fall of ~30bps in margins (the median is ~50bps).
Q3: Rupee EPS?
Our final question in the poll was: Assuming the prevalent exchange rates, what
could be the range of rupee EPS? Our poll suggests that the investor expectation
for Infosys’ EPS, on an average, is ~Rs148 (the median is also ~Rs148).
Sell side expectations
As per Bloomberg, consensus estimate (median) for Infosys’ FY12 $-term revenue
growth is ~26% (assuming that analysts would have assumed ~Rs44.5 in their
models and INR growth is ~23%), the margin is expected to be flattish while the
EPS is ~Rs150.
Interesting difference between Indian and US Sell side
Interestingly, the Indian Sell side analysts are forecasting ~26% revenue growth and
~24% EPS growth. US Sell side is forecasting ~20% revenue growth and ~18%
EPS growth, which is much lower.
History – Actuals Vs Guidance
Over FY06-10, Infosys consistently outperformed its annual guidance (the original
guidance given with the Q4 results). The average beat was ~4% at the upper end
which includes a ~9% miss in FY09 due to the cross currency headwinds and the
deteriorating macro – highlighting the conservative nature of the management
Guidance comparison with Cognizant
Cognizant’s annual guidance (the original guidance given with the Q4 results), on
an average, has been ~12% higher than Infosys’ higher end of guidance over FY06-
11. For CY11, Cognizant has guided for “at least” 26% revenue growth.
Stock performance pre-and-post guidance
We have looked at the Infosys stock performance both pre and post the guidance
dates (for simplicity, we focused on 1-week and 1-month performances). As the data
below shows, there is no discernible pattern.
Our View
Our view, as far as the $-term revenue growth guidance is concerned, is that
Infosys will guide to revenue growth of ~17-20% yoy. In terms of our model, we are
factoring in revenue growth of ~26% yoy ($-term) and EPS of ~Rs150 for FY12
(currency assumption Rs44.5/$).
We believe that ~14% EPS growth (as implied in the guidance) is unlikely to be a
catalyst – particularly given the recent INR appreciation, wage pressures and
increased investments in the business that the company is talking about.
Infosys Technologies
Company description
Infosys is the second-largest Indian IT services company with more than 125,000
professionals, and is a leader in the offshore services space. Infosys provides
business consulting, application development & maintenance and engineering
services to ~610 clients across verticals such as Banking, Financial Services,
Insurance, Retail, Manufacturing and Utilities in the Americas, Europe and Asia
Pacific. Infosys also sells a core banking application, Finacle, which is used by
leading banks in India, the Middle East, Africa and Europe. Its subsidiary, Infosys
BPO, which employs ~18,000 people, is a provider of BPO services.
Investment strategy
We rate Infosys shares as Hold/Low Risk (2L). We are positive on the company's
fundamentals. Offshore IT outsourcing has become a mainstream option, and we
think that scale and scalability, along with an ability to move up the value chain, are
key criteria for successful offshore vendors. In this respect, Infosys appears well
positioned and continues to gain ground given its strong branding and industryleading sales force. We expect Infosys to deliver a revenue CAGR of ~24% ($
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.
HCL Technologies
(HCLT.BO; Rs487.95; 1L)
Valuation: Our target price is Rs560 based on 18x Jun 12E EPS. This is higher
than the mid-point of the 5-20x band that the stock has traded in over the past three
years. We believe a higher multiple is justified given improving macro and potential
benefits arising out of the Axon acquisition. We believe PE remains the most
appropriate valuation measure given HCLT's profitable track record.
Risks: We rate HCLT shares Low Risk which is inline with our quantitative riskrating system as the company has significant scale, enjoys a good brand name and
continues to generate significant FCF. Key downside risks that could impede the
stock from reaching our target price include: (1) any significant appreciation of the
rupee against the USD/EUR/GBP; (2) a sharp slowdown in the US/Global economy;
(3) acquisition-related risks; and (4) the strategy of pursuing large deals could have
negative margin implications.
Wipro
(WIPR.BO; Rs462.00; 1L)
Valuation: Our target price of Rs515 is based on 20x Jun'12E EPS. Our target
multiple is derived from a PE-band analysis of Wipro's historical trading pattern and
peer group valuations. Wipro has traded at 6-22x over the past three years. Given
that revenue visibility is improving with business environment stabilizing, we believe
Wipro should trade higher than the mid-point of the band. We think Wipro will
continue to trade at a discount to Infosys. PE is the most appropriate valuation
measure, in our view, given Wipro's profitability and earnings visibility.
Risks: We rate Wipro Low Risk which is inline with our quantitative risk-rating
system, which tracks 260-day historical share price volatility. Key downside risks
that could cause shares to fall below our target price include: (1) an extended
slowdown in the US/Global economy; and (2) any significant appreciation of the
rupee against the USD/EUR/GBP
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