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INFOSYS TECHNOLOGIES LIMITED
Uncertain margin prospects increase short-term pressure. Sell maintained
Update Following disappointing FY11 results (to end-March) and poor FY12 guidance
reported on 15 April, we reduce our FY12 EPS to $2.88 (from $3.06). We maintain our
Sell rating (new TP $56, from $58) on Infosys. While we believe market demand remains
solid (for FY12, Nasscom revenue estimates: +16-17% for Indian providers, SGe +18%
for Infosys), we remain cautious on Infosys’s margin prospects for two reasons: 1/ Poor
execution in Q4 FY11 potentially spreading into FY12. Despite a strong demand
environment (pricing +2% for a third quarter in a row), Infosys reported a 2% volume
decline in Q4, indicating poor execution in our view; a large decline in utilisation rate
(FY12e: -120bp) due to aggressive hiring (FY12 target: 45k gross hiring); a sharp
increase in unbilled revenue ($92m at end-March) and stable DSO (63 days) at a high
level; 2/ Potential additional investments to regain market share from offshore peers
(TCS, Cognizant): reorganisation (alongside industry lines across all geographies,
creation of a new vertical – public services and healthcare); investment in Europe (23%
group revenue) by hiring more local resources; consolidation of services offering; buildup
of the global delivery platform outside India (e.g. China, Mexico, Brazil) and wage
hikes (2-3% onsite and 10-12% offshore, effective 1 April). Infosys needs to regain
momentum in the insurance and telecoms sectors, where it has been struggling over the
last four quarters.
Impact We cut our FY12 EBIT estimate by 10% to $1.9bn (margin: 26.6%, down 280bp
vs. guidance -300bp) and now expect EPS of $2.88 (from $3.06, guidance $2.83-2.88).
Target price & rating Our new FY12 estimates and a shift in valuation methodology (a
blend of 12m forward EV/EBIT and DCF instead of EV/EBIT multiple alone, as we have
done for the rest of the sector) lead us to a new TP of $56. We maintain our Sell rating
on Infosys due to uncertainties on the group’s margin prospects. Risks to our scenario
include better execution/cost control, stronger demand and FX swings.
Next events & catalysts Infosys will report its Q1 FY12 (to end-June) earnings in July.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFOSYS TECHNOLOGIES LIMITED
Uncertain margin prospects increase short-term pressure. Sell maintained
Update Following disappointing FY11 results (to end-March) and poor FY12 guidance
reported on 15 April, we reduce our FY12 EPS to $2.88 (from $3.06). We maintain our
Sell rating (new TP $56, from $58) on Infosys. While we believe market demand remains
solid (for FY12, Nasscom revenue estimates: +16-17% for Indian providers, SGe +18%
for Infosys), we remain cautious on Infosys’s margin prospects for two reasons: 1/ Poor
execution in Q4 FY11 potentially spreading into FY12. Despite a strong demand
environment (pricing +2% for a third quarter in a row), Infosys reported a 2% volume
decline in Q4, indicating poor execution in our view; a large decline in utilisation rate
(FY12e: -120bp) due to aggressive hiring (FY12 target: 45k gross hiring); a sharp
increase in unbilled revenue ($92m at end-March) and stable DSO (63 days) at a high
level; 2/ Potential additional investments to regain market share from offshore peers
(TCS, Cognizant): reorganisation (alongside industry lines across all geographies,
creation of a new vertical – public services and healthcare); investment in Europe (23%
group revenue) by hiring more local resources; consolidation of services offering; buildup
of the global delivery platform outside India (e.g. China, Mexico, Brazil) and wage
hikes (2-3% onsite and 10-12% offshore, effective 1 April). Infosys needs to regain
momentum in the insurance and telecoms sectors, where it has been struggling over the
last four quarters.
Impact We cut our FY12 EBIT estimate by 10% to $1.9bn (margin: 26.6%, down 280bp
vs. guidance -300bp) and now expect EPS of $2.88 (from $3.06, guidance $2.83-2.88).
Target price & rating Our new FY12 estimates and a shift in valuation methodology (a
blend of 12m forward EV/EBIT and DCF instead of EV/EBIT multiple alone, as we have
done for the rest of the sector) lead us to a new TP of $56. We maintain our Sell rating
on Infosys due to uncertainties on the group’s margin prospects. Risks to our scenario
include better execution/cost control, stronger demand and FX swings.
Next events & catalysts Infosys will report its Q1 FY12 (to end-June) earnings in July.
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