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Volume decline raises performance concerns
Infosys Technologies (Infosys) reported another poor operating performance QoQ. Volumes
declined 1.4% QoQ despite the positive management commentary and indications of a
conducive demand environment from global IT companies. A sharp 550bps QoQ decline in net
utilisation rates worsened the poor performance. The FY12 dollar-revenue growth guidance is
in line with our expectations; however, there are concerns about outperforming the guidance,
considering its back-ended nature. We reduce our FY12 and FY13 estimates and target price.
We maintain Buy on the stock despite the poor operating performance, considering today’s
10% stock-price correction. However, we do not rule out near-term underperformance in a
scenario where peers deliver better results.
Revenue growth disappoints in 4QFY11
Infosys reported disappointing 4Q results, with revenues growing just 1.1% QoQ to reach US$1,602mn,
3.4% below our estimates, and barely meeting the lower end of the guidance. Adjusting for crosscurrency
tailwinds, revenues were below the management’s guidance. The negative surprise was the
1.4% QoQ volume decline in an otherwise conducive demand environment. The 2.5% QoQ improvement
in realisations due to like-to-like price increases and cost-of-living adjustments in contracts kept revenues
afloat. The management pointed to seasonality and client-side project-delays for the volume decline.
Margins contract sharply by 120bps QoQ
The EBITDA margin stood at 32.1%, a 120bps QoQ decline against our expectations of a 60bps
expansion. The decline was driven by one of the steepest QoQ falls of 550bps and 420bps in net and
gross utilisation, to 75.2% and 68.4%, respectively. Excluding the period of recession, the current gross
utlisation rates are one of the lowest since FY03, despite the significant increase in scale since then.
Margins are further expected to decline 300bps in 1QFY12 because of 10-12% offshore and 2-3% onsite
salary hikes. Reported net income was 6% below our estimates, at `18.2bn, but supported by other
income.
FY12 dollar-revenue guidance in line, but back-ended in nature
The 18-20% dollar-revenue growth guidance for FY12 is in line with our expectations, but it appears to
be back-ended. Considering 1QFY12’s 3.6% revenue growth guidance, the CQGR required in the
remaining FY12 quarters would be 5.9% QoQ, to achieve the top end of the guidance. The rupee EPS
guidance of `128, too, was below our expectations of `140. The guidance is based on `44.5/US$ and
factors in a 300bps margin decline due to currency appreciation (~100bps), lower utilisation (~100bps)
and salary hikes (~100bps).
US contribution flattish; insurance vertical drags down growth
The US geography declined 0.5% QoQ while Europe and RoW grew 2.5% and 6.3%. In verticals,
insurance dragged down growth the most, declining 13.4% QoQ, followed by telecom and energy and
utilities verticals declining ~4% QoQ, each. Although revenues from the top client grew 3.3% QoQ,
growth from the remaining top-ten clients was muted; revenues from clients six to ten declined 7% QoQ.
Revising estimates and target price downwards
We reduce our FY12 and FY13 dollar-revenue estimates 4.5% and 4.2%, respectively. EPS estimates are
reduced 8% and 6%, respectively, as we also expect margin performance to be weaker than expected
earlier. We factor in `46.5/US$ and `47/US$ for our FY12 and FY13 estimates (refer Exhibit 3 for
sensitivity). Our target price is lowered 11% to `3,490, representing a lower target multiple of 20x FY13
earnings (21.5x earlier), considering the poor 2HFY11performance. We maintain our Buy rating despite a
poor operating performance, considering today’s 10% correction in stock price. However, we do not rule
out near-term underperformance if peers deliver better results
Conference call takeaways
Demand environment
♦ The demand environment seems to be good, barring unforeseen macroeconomic shocks.
♦ Weakness in the insurance vertical weakness seasonal; the vertical will bounce back in the
next quarter. The telecom vertical is also witnessing one of its strongest pipelines over the
last two years. However, it may be a couple of quarters before the effect on revenues
comes through.
♦ A recruitment target of 45,000 and build-up of bench suggests strong volume growth
ahead.
Operational highlights
♦ Infosys won six large engagements this quarter, four of which were transformational
deals.
♦ During the quarter, 34 new clients were added, of which seven are from the Fortune 500.
♦ Infosys added 8,930 employees in the quarter, taking gross FY11 employee additions to
43,120. It plans to hire 45,000 employees in FY12.
♦ The company points to decision delays at the client end for the weak quarterly
performance. The management believes that this reflects uncertainty in the
macroeconomic environment.
♦ It is investing in the right business lines and is focusing on three revenues streams:
optimisation/costs-related projects, transformation projects and platform-based
operational projects. This would result in some margin sacrifice in the short run.
♦ The company is comfortable with 78-79% net utilisation and faced hiring-related issues
when utilisation was above 80%.
♦ Lower utilisation this quarter indicates future plans. The company wants to invest ahead
and capture a larger part of growth.
♦ FY12 ETR is expected to be 26-27%.
Guidance
♦ The company has set 18-20% dollar-revenue growth guidance for FY12. The revenues
guidance is US$7.13bn-7.25bn. This would result in a 15.4% rupee-revenue growth, to
17.3%.
♦ Margins are expected to decline 300 bps (~100bps in each instance) due to the impact of:
wage hikes planned in FY12
currency headwinds
lower target utilisation
♦ FY12 EPS guidance is `126.05-128.21, representing a 5.5-7.3% growth. This guidance is
based on `44.50/US$ conversion rate.
Departures and board meetings
♦ There were two significant departures from the Board this quarter:
Mr. K Dinesh, Co-founder, retires by rotation, at the June 2011 AGM.
Mr. T.V. Mohandas Pai resigned and will be relieved after the AGM.
♦ The board is meeting on 30 April 2011 to discuss leadership succession plans as Mr
Narayana Murthy retires in August 2011.
Visit http://indiaer.blogspot.com/ for complete details �� ��
Volume decline raises performance concerns
Infosys Technologies (Infosys) reported another poor operating performance QoQ. Volumes
declined 1.4% QoQ despite the positive management commentary and indications of a
conducive demand environment from global IT companies. A sharp 550bps QoQ decline in net
utilisation rates worsened the poor performance. The FY12 dollar-revenue growth guidance is
in line with our expectations; however, there are concerns about outperforming the guidance,
considering its back-ended nature. We reduce our FY12 and FY13 estimates and target price.
We maintain Buy on the stock despite the poor operating performance, considering today’s
10% stock-price correction. However, we do not rule out near-term underperformance in a
scenario where peers deliver better results.
Revenue growth disappoints in 4QFY11
Infosys reported disappointing 4Q results, with revenues growing just 1.1% QoQ to reach US$1,602mn,
3.4% below our estimates, and barely meeting the lower end of the guidance. Adjusting for crosscurrency
tailwinds, revenues were below the management’s guidance. The negative surprise was the
1.4% QoQ volume decline in an otherwise conducive demand environment. The 2.5% QoQ improvement
in realisations due to like-to-like price increases and cost-of-living adjustments in contracts kept revenues
afloat. The management pointed to seasonality and client-side project-delays for the volume decline.
Margins contract sharply by 120bps QoQ
The EBITDA margin stood at 32.1%, a 120bps QoQ decline against our expectations of a 60bps
expansion. The decline was driven by one of the steepest QoQ falls of 550bps and 420bps in net and
gross utilisation, to 75.2% and 68.4%, respectively. Excluding the period of recession, the current gross
utlisation rates are one of the lowest since FY03, despite the significant increase in scale since then.
Margins are further expected to decline 300bps in 1QFY12 because of 10-12% offshore and 2-3% onsite
salary hikes. Reported net income was 6% below our estimates, at `18.2bn, but supported by other
income.
FY12 dollar-revenue guidance in line, but back-ended in nature
The 18-20% dollar-revenue growth guidance for FY12 is in line with our expectations, but it appears to
be back-ended. Considering 1QFY12’s 3.6% revenue growth guidance, the CQGR required in the
remaining FY12 quarters would be 5.9% QoQ, to achieve the top end of the guidance. The rupee EPS
guidance of `128, too, was below our expectations of `140. The guidance is based on `44.5/US$ and
factors in a 300bps margin decline due to currency appreciation (~100bps), lower utilisation (~100bps)
and salary hikes (~100bps).
US contribution flattish; insurance vertical drags down growth
The US geography declined 0.5% QoQ while Europe and RoW grew 2.5% and 6.3%. In verticals,
insurance dragged down growth the most, declining 13.4% QoQ, followed by telecom and energy and
utilities verticals declining ~4% QoQ, each. Although revenues from the top client grew 3.3% QoQ,
growth from the remaining top-ten clients was muted; revenues from clients six to ten declined 7% QoQ.
Revising estimates and target price downwards
We reduce our FY12 and FY13 dollar-revenue estimates 4.5% and 4.2%, respectively. EPS estimates are
reduced 8% and 6%, respectively, as we also expect margin performance to be weaker than expected
earlier. We factor in `46.5/US$ and `47/US$ for our FY12 and FY13 estimates (refer Exhibit 3 for
sensitivity). Our target price is lowered 11% to `3,490, representing a lower target multiple of 20x FY13
earnings (21.5x earlier), considering the poor 2HFY11performance. We maintain our Buy rating despite a
poor operating performance, considering today’s 10% correction in stock price. However, we do not rule
out near-term underperformance if peers deliver better results
Conference call takeaways
Demand environment
♦ The demand environment seems to be good, barring unforeseen macroeconomic shocks.
♦ Weakness in the insurance vertical weakness seasonal; the vertical will bounce back in the
next quarter. The telecom vertical is also witnessing one of its strongest pipelines over the
last two years. However, it may be a couple of quarters before the effect on revenues
comes through.
♦ A recruitment target of 45,000 and build-up of bench suggests strong volume growth
ahead.
Operational highlights
♦ Infosys won six large engagements this quarter, four of which were transformational
deals.
♦ During the quarter, 34 new clients were added, of which seven are from the Fortune 500.
♦ Infosys added 8,930 employees in the quarter, taking gross FY11 employee additions to
43,120. It plans to hire 45,000 employees in FY12.
♦ The company points to decision delays at the client end for the weak quarterly
performance. The management believes that this reflects uncertainty in the
macroeconomic environment.
♦ It is investing in the right business lines and is focusing on three revenues streams:
optimisation/costs-related projects, transformation projects and platform-based
operational projects. This would result in some margin sacrifice in the short run.
♦ The company is comfortable with 78-79% net utilisation and faced hiring-related issues
when utilisation was above 80%.
♦ Lower utilisation this quarter indicates future plans. The company wants to invest ahead
and capture a larger part of growth.
♦ FY12 ETR is expected to be 26-27%.
Guidance
♦ The company has set 18-20% dollar-revenue growth guidance for FY12. The revenues
guidance is US$7.13bn-7.25bn. This would result in a 15.4% rupee-revenue growth, to
17.3%.
♦ Margins are expected to decline 300 bps (~100bps in each instance) due to the impact of:
wage hikes planned in FY12
currency headwinds
lower target utilisation
♦ FY12 EPS guidance is `126.05-128.21, representing a 5.5-7.3% growth. This guidance is
based on `44.50/US$ conversion rate.
Departures and board meetings
♦ There were two significant departures from the Board this quarter:
Mr. K Dinesh, Co-founder, retires by rotation, at the June 2011 AGM.
Mr. T.V. Mohandas Pai resigned and will be relieved after the AGM.
♦ The board is meeting on 30 April 2011 to discuss leadership succession plans as Mr
Narayana Murthy retires in August 2011.
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