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Infosys Technologies (INFO)
Technology
Punching below its weight. Infosys’ performance disappointed us on several counts
(1) miss of volume guidance, (2) apparent slippage on control of operations—decline in
volumes, collapse in utilization rates, and sharp increase in receivable days are
concerning signs and (3) further delay in announcement of new organization structure.
We are not too perturbed about ’OPM‘ guidance and believe that OPM can be
managed as long as operations are tightened. We cut our FY2012E EPS estimate to
Rs145 but maintain BUY on top-down sector view. TP cut to Rs3,450/share.
A poor quarter on all counts
Infosys reported an all-round weak quarter. Revenue and net income missed our below-consensus
estimate by 2.2% and 1.2%, respectively. The performance was inexplicable and also reflected in
slippage in operations. This is reflected in several metrics including (1) miss of volume guidance in
a strong demand environment; (2) aggressive hiring despite volumes decline leading to a collapse
in utilization rates; (3) material US$129 mn increase in debtors and unbilled revenues; (4) further
delay in announcement of new organization structure and (5) material onsite wage increase.
Loses leadership in core areas
Infosys is ceding leadership in core areas, which is contrary to its historical track record and
concerning for a company that commands ’bellwether‘ status. After losing leadership in the
telecom vertical, the company will likely concede leadership in North American revenues to
Cognizant. Cognizant is breathing down Infosys’ neck on financial services revenues as well.
Not too perturbed on margins guidance in case the company gets it act together on operations
Infosys has guided for a 300 bps decline in OPM for FY2012E; this has spooked the market. We
note that the margin guidance does not build in any pricing improvement from 4QFY11 levels, a
highly improbable event, in our view. Reasons attributed for margin decline are well-known and
can be mitigated through potential price increase and efficiencies on operations. However, the
company has to get its act together on operations— completion of management and organization
structure changes will help channelize energies in the right direction.
Why do we still retain our BUY rating?
We retain our BUY rating on (1) positive top-down view on the demand environment; (2) Infosys’
solid positioning in areas that matter for scale and (3) potential negatives are known and
discounted in the price. We have tweaked our estimates and reduce FY2012E and FY2013E
revenue estimates by 3.5% and 4.2%. We also lower our FY2012E and FY2013E EPS estimate by
6.7% and 6.6% to Rs145 and Rs173. TP reduced to Rs3,450/share from Rs3,700 earlier.
Change in organization structure; decision on succession planning on April 30
Delays in new structure announcement acted as unnecessary distraction and may have led to
short-term loss of focus and revenues at Infosys, in our view. Infosys has alluded to changes
in organization structure though they did not announce the names of people who would be
donning the new roles. Key highlights of the changes include (1) verticalization of the
organization across all geographies as compared to North American geography earlier; (2)
consolidation of services offerings in three key buckets, viz transformation, innovation and
operations. Transformational services will likely comprise consulting, package
implementation and systems integration. Innovation will comprise new engagement models,
products and platforms, while the rest of the services will be under operations; (3) verticals
will be clubbed under four major groups, viz BFSI, manufacturing, retail, CPG, logistics & life
sciences and E&U, services & telecom. In addition, the company has created a new vertical
viz public services and healthcare. Mr. Mohandas Pai’s resignation from the board of Infosys
was not a part of the planned reorganization.
Without arguing about the depth of the current management team, we highlight (1)
responsibilities have been aggregated with the senior management team at Infosys over the
last three years rather than devolved and (2) the company has made little external additions
to the senior management team over the last few years. Such additions always help in crosspollination
of ideas and bring new perspectives to an organization.
Strong demand environment reflects in revenue guidance for FY2012E
Infosys has guided for 18-20% growth in US$ revenues for FY2012E. We believe that the
Tier-1 IT companies will likely do well in FY2012E backed by (1) broad-based IT spend revival,
(2) strong large deal renewal cycle with greater participation and win rate for the Indian
names, (3) sustained market share gains for offshore pure-plays, (4) continued footprint
expansion across un/under-penetrated areas and (5) pricing uptick.
Factors that will drive growth for Infosys include (1) continuation of large M&A integration
deal wins which are further supported by regulatory compliance deals; (2) strong ‘musthave’
account wins. These wins are in some of the company’s large verticals (BFSI, Telecom,
Retail) and will provide strong impetus to growth in FY2012E, in our view, (3) broad-based
recovery and (4) significant reduction in deal closure times.
Infosys’ guidance implies 5.5-6% growth from 2Q-4Q of FY2012E to achieve the upper-end
of the guidance. 1QFY12E revenue growth guidance of 2.6-3.6% is conservative, in our
view, with significant headroom to outperform.
Margin and EPS guidance disappoints
Gap between Infosys US$ revenue growth and EPS growth guidance is a staggering 12%
pts. Guidance builds in OPM decline of 300 bps on the back (1) investments in local hiring
and consulting; this may impact margins by 130 bps and (2) wage inflation impact of 100
bps and (3) 100 bps of currency impact; guidance is based on Re/US$ rate of 44.5. We
believe that the overall margin decline guidance is conservative and may not have factored
potential improvement in pricing (2-3% likely), broadening of pyramid and scale-led cost
absorption benefits. We would also highlight that Infosys always guides for at least 150-200
bps margin decline at the beginning of the fiscal but this has never translated into actual
performance – its margins for FY2011 were similar to FY2004 levels.
Muted margin guidance also reflects in the subdued 5.5-7.3% EPS growth guidance for
FY2012E to Rs126.1-128.2. EPS guidance builds in a 26-27% ETR for FY2012E.
4QFY11—a poor quarter
4QFY11 was an all-round weak quarter. Volumes declined 1.4% qoq and grew at a modest
17.2% yoy. Key underperforming areas included (1) insurance vertical declined 13% qoq to
US$115 mn; (2) telecom vertical once again reported 3.8% decline in revenues to US$190
mn. Telecom vertical revenues have hardly improved from the lows of the downturn and (3)
revenues from most of the new offerings declined meaningfully.
Operating margin declined 120 bps qoq on account of (1) decline in utilization rates by 700
bps qoq, (2) significant increase in per capita wage onsite that increased 6.7% qoq and (3)
other operational costs. On the positive side, onsite realization increased by 0.7% and
offshore by 3.6% qoq.
Net income of Rs18.2 bn was 1.2% lower than our estimate and helped by significant
growth in treasury income. Other income grew 43% qoq to Rs4.2 bn.
Other highlights
1QFY12E guidance – Infosys has guided for a 2.6-3.6% sequential growth in revenues for
the June 2011 quarter to US$1,643-1,659 mn. EPS guidance for 1QFY12E stands at
Rs27.6-28, a qoq decline of 11.6-13%. Infosys has assumed the impact of 10-12%
offshore and 2-3% onsite wage hike, effective April 1, into the EPS guidance.
Gross hiring target for FY2012E – Infosys has guided for a gross hiring target of 45,000
for FY2012E. This may translate into a net hiring of 20,000-25,000, a growth of 15-20%
over the end-FY2011 employee base.
Utilization rate – Infosys’ utilization rate fell sharply in 4QFY11E to 73.4% (ex-trainees),
down 700 bps qoq. The company indicated that this is well below its target range of 76-
78%. However, it has built in a utilization level below the target range for FY2012E as
well – impact of the same is built into the margin guidance for FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFO)
Technology
Punching below its weight. Infosys’ performance disappointed us on several counts
(1) miss of volume guidance, (2) apparent slippage on control of operations—decline in
volumes, collapse in utilization rates, and sharp increase in receivable days are
concerning signs and (3) further delay in announcement of new organization structure.
We are not too perturbed about ’OPM‘ guidance and believe that OPM can be
managed as long as operations are tightened. We cut our FY2012E EPS estimate to
Rs145 but maintain BUY on top-down sector view. TP cut to Rs3,450/share.
A poor quarter on all counts
Infosys reported an all-round weak quarter. Revenue and net income missed our below-consensus
estimate by 2.2% and 1.2%, respectively. The performance was inexplicable and also reflected in
slippage in operations. This is reflected in several metrics including (1) miss of volume guidance in
a strong demand environment; (2) aggressive hiring despite volumes decline leading to a collapse
in utilization rates; (3) material US$129 mn increase in debtors and unbilled revenues; (4) further
delay in announcement of new organization structure and (5) material onsite wage increase.
Loses leadership in core areas
Infosys is ceding leadership in core areas, which is contrary to its historical track record and
concerning for a company that commands ’bellwether‘ status. After losing leadership in the
telecom vertical, the company will likely concede leadership in North American revenues to
Cognizant. Cognizant is breathing down Infosys’ neck on financial services revenues as well.
Not too perturbed on margins guidance in case the company gets it act together on operations
Infosys has guided for a 300 bps decline in OPM for FY2012E; this has spooked the market. We
note that the margin guidance does not build in any pricing improvement from 4QFY11 levels, a
highly improbable event, in our view. Reasons attributed for margin decline are well-known and
can be mitigated through potential price increase and efficiencies on operations. However, the
company has to get its act together on operations— completion of management and organization
structure changes will help channelize energies in the right direction.
Why do we still retain our BUY rating?
We retain our BUY rating on (1) positive top-down view on the demand environment; (2) Infosys’
solid positioning in areas that matter for scale and (3) potential negatives are known and
discounted in the price. We have tweaked our estimates and reduce FY2012E and FY2013E
revenue estimates by 3.5% and 4.2%. We also lower our FY2012E and FY2013E EPS estimate by
6.7% and 6.6% to Rs145 and Rs173. TP reduced to Rs3,450/share from Rs3,700 earlier.
Change in organization structure; decision on succession planning on April 30
Delays in new structure announcement acted as unnecessary distraction and may have led to
short-term loss of focus and revenues at Infosys, in our view. Infosys has alluded to changes
in organization structure though they did not announce the names of people who would be
donning the new roles. Key highlights of the changes include (1) verticalization of the
organization across all geographies as compared to North American geography earlier; (2)
consolidation of services offerings in three key buckets, viz transformation, innovation and
operations. Transformational services will likely comprise consulting, package
implementation and systems integration. Innovation will comprise new engagement models,
products and platforms, while the rest of the services will be under operations; (3) verticals
will be clubbed under four major groups, viz BFSI, manufacturing, retail, CPG, logistics & life
sciences and E&U, services & telecom. In addition, the company has created a new vertical
viz public services and healthcare. Mr. Mohandas Pai’s resignation from the board of Infosys
was not a part of the planned reorganization.
Without arguing about the depth of the current management team, we highlight (1)
responsibilities have been aggregated with the senior management team at Infosys over the
last three years rather than devolved and (2) the company has made little external additions
to the senior management team over the last few years. Such additions always help in crosspollination
of ideas and bring new perspectives to an organization.
Strong demand environment reflects in revenue guidance for FY2012E
Infosys has guided for 18-20% growth in US$ revenues for FY2012E. We believe that the
Tier-1 IT companies will likely do well in FY2012E backed by (1) broad-based IT spend revival,
(2) strong large deal renewal cycle with greater participation and win rate for the Indian
names, (3) sustained market share gains for offshore pure-plays, (4) continued footprint
expansion across un/under-penetrated areas and (5) pricing uptick.
Factors that will drive growth for Infosys include (1) continuation of large M&A integration
deal wins which are further supported by regulatory compliance deals; (2) strong ‘musthave’
account wins. These wins are in some of the company’s large verticals (BFSI, Telecom,
Retail) and will provide strong impetus to growth in FY2012E, in our view, (3) broad-based
recovery and (4) significant reduction in deal closure times.
Infosys’ guidance implies 5.5-6% growth from 2Q-4Q of FY2012E to achieve the upper-end
of the guidance. 1QFY12E revenue growth guidance of 2.6-3.6% is conservative, in our
view, with significant headroom to outperform.
Margin and EPS guidance disappoints
Gap between Infosys US$ revenue growth and EPS growth guidance is a staggering 12%
pts. Guidance builds in OPM decline of 300 bps on the back (1) investments in local hiring
and consulting; this may impact margins by 130 bps and (2) wage inflation impact of 100
bps and (3) 100 bps of currency impact; guidance is based on Re/US$ rate of 44.5. We
believe that the overall margin decline guidance is conservative and may not have factored
potential improvement in pricing (2-3% likely), broadening of pyramid and scale-led cost
absorption benefits. We would also highlight that Infosys always guides for at least 150-200
bps margin decline at the beginning of the fiscal but this has never translated into actual
performance – its margins for FY2011 were similar to FY2004 levels.
Muted margin guidance also reflects in the subdued 5.5-7.3% EPS growth guidance for
FY2012E to Rs126.1-128.2. EPS guidance builds in a 26-27% ETR for FY2012E.
4QFY11—a poor quarter
4QFY11 was an all-round weak quarter. Volumes declined 1.4% qoq and grew at a modest
17.2% yoy. Key underperforming areas included (1) insurance vertical declined 13% qoq to
US$115 mn; (2) telecom vertical once again reported 3.8% decline in revenues to US$190
mn. Telecom vertical revenues have hardly improved from the lows of the downturn and (3)
revenues from most of the new offerings declined meaningfully.
Operating margin declined 120 bps qoq on account of (1) decline in utilization rates by 700
bps qoq, (2) significant increase in per capita wage onsite that increased 6.7% qoq and (3)
other operational costs. On the positive side, onsite realization increased by 0.7% and
offshore by 3.6% qoq.
Net income of Rs18.2 bn was 1.2% lower than our estimate and helped by significant
growth in treasury income. Other income grew 43% qoq to Rs4.2 bn.
Other highlights
1QFY12E guidance – Infosys has guided for a 2.6-3.6% sequential growth in revenues for
the June 2011 quarter to US$1,643-1,659 mn. EPS guidance for 1QFY12E stands at
Rs27.6-28, a qoq decline of 11.6-13%. Infosys has assumed the impact of 10-12%
offshore and 2-3% onsite wage hike, effective April 1, into the EPS guidance.
Gross hiring target for FY2012E – Infosys has guided for a gross hiring target of 45,000
for FY2012E. This may translate into a net hiring of 20,000-25,000, a growth of 15-20%
over the end-FY2011 employee base.
Utilization rate – Infosys’ utilization rate fell sharply in 4QFY11E to 73.4% (ex-trainees),
down 700 bps qoq. The company indicated that this is well below its target range of 76-
78%. However, it has built in a utilization level below the target range for FY2012E as
well – impact of the same is built into the margin guidance for FY2012E.
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