Infosys Technologies -Sell-off overdone; target: Rs3,650 :: Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Infosys Technologies
Sell-off overdone; Reiterate OP
Event
 Infosys stock corrected 10% post 4Q results announced on Friday morning.
Volume decline in 4Q and FY12 guidance of 300bp margin decline were the
culprits for the severe stock reaction, in our view. We stick to our positive
investment bias based on a strong demand outlook. Even so, we have cut our
earnings by 5% for FY12 and 3% for FY13 to recognise limited room to
manage margins against FX headwinds and company’s comfort utilisation
level. Reiterate OP.

Impact
 Demand enthusiasm not reflected in EPS guidance. Infosys top
management reiterated on the earnings call that FY12 should be a normal
year and they are confident of their 18-20% revenue growth outlook. We
believe the EPS guidance of Rs128 is not reflecting the positive demand
scenario. A case in point: the strong hiring guidance put forward by the
company – 45K gross employee addition vs. 43K employee addition in FY11.
 Margin guidance factoring in the negatives but positives not counted.
The 300bps decline in operating margins is made up of three moving parts:
2% INR appreciation (100bps),
Utilization remaining at ~78% with 45K employee adds (120bps), and
Wage hike and regular investment in business (80bps).
The outlook does not factor in any pricing improvement through FY12 and
management agrees that any upside to revenue target would mean upward
bias to margins.
 Pricing holds the key to FY12 performance. Successive decline in offshore
pricing from 3QFY09 to 2QFY11 implies that offshore pricing in 4Q FY11 is
still 7% below the pre GFC level. While we do not expect the pricing to hit that
level anytime soon, a return to normal budgetary cycles and robust demand
gives us reason to be optimistic on this front. For detailed analysis on different
margin levers and our take on them, please see Figure 1.
Earnings and target price revision
 Our revised FY12 and FY13 EPS is Rs143 (down 5%) and Rs178 (down 3%)
respectively. Our new DCF-based TP is Rs3,650 (Rs3,750 earlier).
Price catalyst
 12-month price target: Rs3,650.00 based on a DCF methodology.
 Catalyst: Large deal wins and uptick in discretionary spend
Action and recommendation
 Retain OP. We remain comfortable with our above-consensus 29% US$
revenue growth forecast in FY12E. The sequential volume decline and margin
outlook were dampeners but we think the stock has been over-penalised.