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Infosys Technology- Upgrading to Strong Buy on tempered expectation…
Infosys’ Q4FY11 numbers missed estimates but what surprised was the
“too” conservative FY12 EPS guidance. Though 18-20% US$ revenue
growth was ahead of our 16.5-18.5% initial guidance estimate, rupee
EPS guidance of | 126.1-128.2, missed our conservative | 135-137
estimate. Though it is customary for Infosys to guide low and
outperform, a 10% decline in the stock was led in part by heightened
street expectations (FY12E EPS of | 150) and weak guidance. However,
we believe FY12E guidance assumptions need detailed scrutiny (refer
first highlight). Consequently, though we have lowered our FY12E and
introduced FY13E estimates, we have changed our rating to STRONG
BUY (HOLD earlier) as a further decline in the stock provides attractive
entry points.
FY12 guidance assumptions need detailed scrutiny
While Infosys guided for 2.6-3.6% QoQ US dollar revenue growth in
Q1FY12, full year FY12 US dollar revenue growth guidance of 18-
20% assumes 5-5.5% QoQ growth for the next three quarters as
stated during the analyst call. Further, Infosys expects lower
utilisation to impact FY12 operating margins by ~100-120 bps
(pegged at 78%-79% for guidance). However, during the analyst
call, the management suggested, excluding trainees, utilisation
could improve from Q4FY11 levels of 75.2% if growth comes. Note,
excluding trainees, it improved 4.5 percentage points (pp) to 78.9%
in FY11 vs. 74.4% in FY10. Finally, Infosys expects an operating
margin impact of 100 bps due to currency (assuming |/$ rate of 44.5
similar to what it had built in its FY11 guidance in April 2010).
Noticeably, in FY11 operating margins declined 100 bps only despite
5% appreciation of rupee vs. dollar.
Valuation
We are adjusting our FY12E and introducing our FY13E estimates. Our
estimates assume 18%/13.5% CAGR rupee revenue/EPS growth during
FY10-FY13E. We have valued Infosys at 20.9x its FY13E EPS of | 160, a
discount relative to its historical one year average forward PE of 22x, to
account for the longer time horizon. Consequently, we have changed our
rating to STRONG BUY with a 12 month target price of | 3350 per share.
Result summary: misses estimates
Infosys reported its Q4FY11 revenues of | 7,250 crore (22% YoY and
2% QoQ growth) below our | 7,335 crore estimate. The operating
profit of | 2,102 crore was also below our | 2,222 crore estimate on
an operating margin of 29% (our estimate: 30.3%). The company
earned | 31.8 in diluted EPS below our | 32.4 estimate.
Operating Metric Highlights
Application development grew 18.5% YoY and 4.3% QoQ and stood
at 16.1% of the revenues. Business process outsourcing and system
integration grew 1.1% and 10.1% QoQ and 11.6% and 67.6% YoY,
respectively. Product revenues grew 3% QoQ and 33.5% YoY on
top of 33.7% QoQ growth in Q3FY11. From a vertical perspective,
BFSI declined 0.5% QoQ primarily due to softness in a few
insurance clients. Retail was soft with 1.1% QoQ growth while
transportation & logistics saw demand pick up with 17.9% QoQ
growth. Geographically, Europe’s contribution increased 0.3 pp to
22.1% vs. 21.8% in Q3 and grew 2.5% QoQ. India’s contribution
increased 0.5 pp to 2.7% vs. 2.2% in Q3 and grew 24% QoQ. Top
client grew 3.3% QoQ while Top 5 (excluding top 1) and top 10
(excluding top 5) grew 0.1% and declined 6.8% QoQ. The company
added 34 clients in Q4FY11. Gross additions stood at 8,930 while net
additions were 3,041. The company added ~3,591 lateral hires.
Onsite effort was flat at 24.6% while LTM attrition declined QoQ to
17% vs. 17.5% in Q3. However, absolute attrition increased QoQ to
5,889 heads vs. 5,756 in Q3FY11
Valuation
We are adjusting our FY12E estimates and introducing our FY13E
estimates. Our estimates assume 18%/13.5% CAGR rupee revenue/EPS
growth during FY10-FY13E. We have valued Infosys at 20.9x its FY13E
EPS of | 160, a discount relative to its historical one year average forward
PE of 22x, to account for the longer time horizon. Consequently, we have
changed our rating to STRONG BUY with a 12 month target price of |
3350 per share.
Risk & Concern
Though the pound, euro and Australian dollar created tailwinds in
Q4FY11, cross currency volatility remains a key concern. Noticeably,
Infosys guided FY12 revenues at an average rupee/dollar rate of 44.5. A
significant appreciation of the rupee from these levels could impact
operating margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technology- Upgrading to Strong Buy on tempered expectation…
Infosys’ Q4FY11 numbers missed estimates but what surprised was the
“too” conservative FY12 EPS guidance. Though 18-20% US$ revenue
growth was ahead of our 16.5-18.5% initial guidance estimate, rupee
EPS guidance of | 126.1-128.2, missed our conservative | 135-137
estimate. Though it is customary for Infosys to guide low and
outperform, a 10% decline in the stock was led in part by heightened
street expectations (FY12E EPS of | 150) and weak guidance. However,
we believe FY12E guidance assumptions need detailed scrutiny (refer
first highlight). Consequently, though we have lowered our FY12E and
introduced FY13E estimates, we have changed our rating to STRONG
BUY (HOLD earlier) as a further decline in the stock provides attractive
entry points.
FY12 guidance assumptions need detailed scrutiny
While Infosys guided for 2.6-3.6% QoQ US dollar revenue growth in
Q1FY12, full year FY12 US dollar revenue growth guidance of 18-
20% assumes 5-5.5% QoQ growth for the next three quarters as
stated during the analyst call. Further, Infosys expects lower
utilisation to impact FY12 operating margins by ~100-120 bps
(pegged at 78%-79% for guidance). However, during the analyst
call, the management suggested, excluding trainees, utilisation
could improve from Q4FY11 levels of 75.2% if growth comes. Note,
excluding trainees, it improved 4.5 percentage points (pp) to 78.9%
in FY11 vs. 74.4% in FY10. Finally, Infosys expects an operating
margin impact of 100 bps due to currency (assuming |/$ rate of 44.5
similar to what it had built in its FY11 guidance in April 2010).
Noticeably, in FY11 operating margins declined 100 bps only despite
5% appreciation of rupee vs. dollar.
Valuation
We are adjusting our FY12E and introducing our FY13E estimates. Our
estimates assume 18%/13.5% CAGR rupee revenue/EPS growth during
FY10-FY13E. We have valued Infosys at 20.9x its FY13E EPS of | 160, a
discount relative to its historical one year average forward PE of 22x, to
account for the longer time horizon. Consequently, we have changed our
rating to STRONG BUY with a 12 month target price of | 3350 per share.
Result summary: misses estimates
Infosys reported its Q4FY11 revenues of | 7,250 crore (22% YoY and
2% QoQ growth) below our | 7,335 crore estimate. The operating
profit of | 2,102 crore was also below our | 2,222 crore estimate on
an operating margin of 29% (our estimate: 30.3%). The company
earned | 31.8 in diluted EPS below our | 32.4 estimate.
Operating Metric Highlights
Application development grew 18.5% YoY and 4.3% QoQ and stood
at 16.1% of the revenues. Business process outsourcing and system
integration grew 1.1% and 10.1% QoQ and 11.6% and 67.6% YoY,
respectively. Product revenues grew 3% QoQ and 33.5% YoY on
top of 33.7% QoQ growth in Q3FY11. From a vertical perspective,
BFSI declined 0.5% QoQ primarily due to softness in a few
insurance clients. Retail was soft with 1.1% QoQ growth while
transportation & logistics saw demand pick up with 17.9% QoQ
growth. Geographically, Europe’s contribution increased 0.3 pp to
22.1% vs. 21.8% in Q3 and grew 2.5% QoQ. India’s contribution
increased 0.5 pp to 2.7% vs. 2.2% in Q3 and grew 24% QoQ. Top
client grew 3.3% QoQ while Top 5 (excluding top 1) and top 10
(excluding top 5) grew 0.1% and declined 6.8% QoQ. The company
added 34 clients in Q4FY11. Gross additions stood at 8,930 while net
additions were 3,041. The company added ~3,591 lateral hires.
Onsite effort was flat at 24.6% while LTM attrition declined QoQ to
17% vs. 17.5% in Q3. However, absolute attrition increased QoQ to
5,889 heads vs. 5,756 in Q3FY11
Valuation
We are adjusting our FY12E estimates and introducing our FY13E
estimates. Our estimates assume 18%/13.5% CAGR rupee revenue/EPS
growth during FY10-FY13E. We have valued Infosys at 20.9x its FY13E
EPS of | 160, a discount relative to its historical one year average forward
PE of 22x, to account for the longer time horizon. Consequently, we have
changed our rating to STRONG BUY with a 12 month target price of |
3350 per share.
Risk & Concern
Though the pound, euro and Australian dollar created tailwinds in
Q4FY11, cross currency volatility remains a key concern. Noticeably,
Infosys guided FY12 revenues at an average rupee/dollar rate of 44.5. A
significant appreciation of the rupee from these levels could impact
operating margins.
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