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Infosys Technologies
High likelihood of beating
lowered expectations
„Worst likely behind; Should beat lowered expectations
Post Infy’s dismal 4Q revenue & cautious FY12 margin guidance, we cut FY12 &
FY13 EPS estimates by ~6% each and PO to Rs3,700 (24% potential upside). In
our view, the estimate cut is more than discounted by the nearly 10% stock price
correction on Friday. Going ahead, we believe there is a high likelihood of Infy
beating lowered expectations. We see revenue led upside risk to estimates on a)
strong hiring b) large deal closures and c) operating leverage. Key risk: Outcome
of management succession & reshuffle on April 30 & any delays in deal ramp-ups.
4Q revenues, chief disappointment…
4Q revs (INR terms) grew 2% qoq missing our estimates by 2.6% and a tad lower
than the constant currency revenue guidance as well. This was likely due to client
specific issues & seasonal delays in insurance, telecom and utilities’ verticals.
Blended pricing moved up for the 3rd consecutive quarter aided by mix too.
…But encouraging indicators for revenue outlook
Apart from management stating that the issues were behind, we believe Infy could
outperform the FY12 USD rev growth guidance of 18-20% given a) strong gross
hiring of 8,900 in the quarter, 50% ahead of the plan and including 40% laterals b)
sharp pick up in large deal closures from 2-3 deals last qrt to 10 this qrt and c)
likely continued pricing uptick. We have factored in 23% USD rev growth.
Operating leverage should help beat weak margin guidance
We believe Infy is well poised to beat its 300bps FY12 margin decline guidance
on higher utilization than assumed and SG&A leverage on likely outperformance
of volume guidance. Realizations will also likely be higher than assumed, in our
view. We assume a 150bps margin hit to factor in any investments, but see
upside risk from favorable mix & offshore shift.
Operating leverage should help beat FY12
margin guidance
Management guided to a 300bps decline in FY12 EBIT margin assuming a
100bps decline each from a) utilization dropping 200-300bps as they build bench
to capture growth opportunities b) wage hike offset partly by employee pyramid
broadening and c) Rupee appreciation of 2%. Infy has assumed a Rs/USD
assumption of Rs44.5 for its guidance. We have assumed Rs45 in our model, as
per our macro forecasts.
We believe Infy is well poised to beat its 300bps FY12 margin decline
guidance on higher utilization than assumed in guidance and SG&A
leverage, given likely outperformance of volume and pricing guidance.
We assume a 150bps margin hit to factor in any investments in onsite
hiring/solution offerings, but see upside risk from favorable mix &
offshore shift.
Rev outperformance should help hold utilization
Utilization rates for Infy have been lower than for peers like TCS and Wipro in the
previous few quarters and a 200-300bps drop in utilization rates assumed in
FY12 guidance appears sharp to us. In our view, a 23% revenue growth in the
year should help hold utilization steady.
Price objective basis & risk
Infosys Tech (INFYF / INFY)
Our Price Objective of Rs3,700 (US$80 for ADR, at parity) is based on a target
FY12 EV/EBITDA to 2yr EBITDA growth of 0.95x, in-line with its 5yr median
multiple. This implies a FY13e P/E of approximately 22x, broadly in line with
current 1yr forward (FY12e) PE. Downside risks to estimates stem from macro
led delays in IT spend, sharp appreciation of the Rupee and Outcome of
management succession & reshuffle.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Infosys Technologies
High likelihood of beating
lowered expectations
„Worst likely behind; Should beat lowered expectations
Post Infy’s dismal 4Q revenue & cautious FY12 margin guidance, we cut FY12 &
FY13 EPS estimates by ~6% each and PO to Rs3,700 (24% potential upside). In
our view, the estimate cut is more than discounted by the nearly 10% stock price
correction on Friday. Going ahead, we believe there is a high likelihood of Infy
beating lowered expectations. We see revenue led upside risk to estimates on a)
strong hiring b) large deal closures and c) operating leverage. Key risk: Outcome
of management succession & reshuffle on April 30 & any delays in deal ramp-ups.
4Q revenues, chief disappointment…
4Q revs (INR terms) grew 2% qoq missing our estimates by 2.6% and a tad lower
than the constant currency revenue guidance as well. This was likely due to client
specific issues & seasonal delays in insurance, telecom and utilities’ verticals.
Blended pricing moved up for the 3rd consecutive quarter aided by mix too.
…But encouraging indicators for revenue outlook
Apart from management stating that the issues were behind, we believe Infy could
outperform the FY12 USD rev growth guidance of 18-20% given a) strong gross
hiring of 8,900 in the quarter, 50% ahead of the plan and including 40% laterals b)
sharp pick up in large deal closures from 2-3 deals last qrt to 10 this qrt and c)
likely continued pricing uptick. We have factored in 23% USD rev growth.
Operating leverage should help beat weak margin guidance
We believe Infy is well poised to beat its 300bps FY12 margin decline guidance
on higher utilization than assumed and SG&A leverage on likely outperformance
of volume guidance. Realizations will also likely be higher than assumed, in our
view. We assume a 150bps margin hit to factor in any investments, but see
upside risk from favorable mix & offshore shift.
Operating leverage should help beat FY12
margin guidance
Management guided to a 300bps decline in FY12 EBIT margin assuming a
100bps decline each from a) utilization dropping 200-300bps as they build bench
to capture growth opportunities b) wage hike offset partly by employee pyramid
broadening and c) Rupee appreciation of 2%. Infy has assumed a Rs/USD
assumption of Rs44.5 for its guidance. We have assumed Rs45 in our model, as
per our macro forecasts.
We believe Infy is well poised to beat its 300bps FY12 margin decline
guidance on higher utilization than assumed in guidance and SG&A
leverage, given likely outperformance of volume and pricing guidance.
We assume a 150bps margin hit to factor in any investments in onsite
hiring/solution offerings, but see upside risk from favorable mix &
offshore shift.
Rev outperformance should help hold utilization
Utilization rates for Infy have been lower than for peers like TCS and Wipro in the
previous few quarters and a 200-300bps drop in utilization rates assumed in
FY12 guidance appears sharp to us. In our view, a 23% revenue growth in the
year should help hold utilization steady.
Price objective basis & risk
Infosys Tech (INFYF / INFY)
Our Price Objective of Rs3,700 (US$80 for ADR, at parity) is based on a target
FY12 EV/EBITDA to 2yr EBITDA growth of 0.95x, in-line with its 5yr median
multiple. This implies a FY13e P/E of approximately 22x, broadly in line with
current 1yr forward (FY12e) PE. Downside risks to estimates stem from macro
led delays in IT spend, sharp appreciation of the Rupee and Outcome of
management succession & reshuffle.
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