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UBS Investment Research
Infosys Technologies Ltd.
Analysing guidance outperformance
Expectations for guidance have increased after Accenture results
We believe that expectations of a strong initial guidance from Infosys have risen
after strong numbers from Accenture in March 2011. We expect FY12 dollar
revenue guidance of 19-21% YoY growth, which is likely to translate into rupee
revenue growth guidance of 15-17% YoY, a 150bp margin decline and rupee EPS
of 11.4-13% YoY. In rupee terms, we expect an FY12 EPS guidance of Rs134.7-
136.7.
How much outperformance can we expect over guidance?
We expect Infosys to beat FY11 initial guidance by 8.9% and 6.9% in rupee
revenue and EPS, respectively. While one could argue that the extent of beat in
FY12 could be lower, we do not think it unreasonable to expect the average 8- 9%
beat seen on revenue and EPS guidance over the past 10 years.
EPS guidance has been more conservative than revenue in the past
Infosys has been more consistent in beating its initial EPS guidance than its
revenue guidance, beating the upper end of rupee revenue guidance by 8.4% and
EPS by 9.4% on average. We believe that Infosys tends to be more conservative in
its margin guidance than revenue, and we expect FY12 to be in line with this trend.
Valuation: maintain Buy; expect strong EPS growth in FY12
We expect strong demand, better pricing and lower attrition to help Infosys reduce
the margin impact of investments into sales & marketing, domain capabilities and
onsite hiring in FY12. We expect margin decline to be less than the 130bp seen in
9M FY11, and expect strong revenue and EPS growth in FY12. We maintain our
Buy/ Short-term Buy rating, based on our expectations of a strong guidance. Our
price target is based on a DCF methodology.
We expect margin conservatism in FY12 guidance
We expect more robust initial revenue guidance from Infosys in FY12 compared
with FY11 given the strong demand recovery seen in 2010 which has led to
better revenue visibility. NASSCOM estimates dollar revenue for the Indian IT
services sector to grow at 16-18% YoY in FY12. We expect Infosys to guide for
19-21% YoY growth in dollar revenue given its past history of guiding above
NASSCOM industry estimates. While we expect stronger initial revenue
guidance as compared to FY11, we expect Infosys to remain conservative in its
margin guidance.
Strong revenue, lower attrition, pricing stability to help
minimise margin decline
We anticipate a 150bp decline in EBITDA margins to be embedded into the
initial guidance for FY12 given the company’s stance that it would aggressively
invest into domain skills and onsite delivery. However, we have observed that
strong revenue growth and pricing stability have helped minimise margin impact
in the past. We believe strong revenue growth, pricing stability, an improvement
in service mix and lower attrition vis-à-vis FY11 should help Infosys minimise
the impact on operating margins. We expect Infosys to report a 50bp margin
decline in FY12 vs. 130bp in FY11.
Infosys has mostly outperformed revenue guidance
Infosys has consistently beaten its initial guidance for revenue and earnings
growth, with very few exceptions. On an average, the difference between initial
guidance and reported numbers has been around 8.5% in rupee revenue. In
dollar terms (which excludes the currency impact), Infosys has beaten its initial
revenue guidance more consistently, with recessionary periods being the only
exceptions, when the company performed below its initial guidance.
Beat in EPS guidance has been more consistent
Infosys seems to be more conservative in its EPS growth guidance, with the
company rarely missing its initial guidance. Average differential between initial
EPS growth guidance and reported numbers is also higher at 9.5%, which
implies relatively more conservatism in the margin guidance.
Infosys Technologies Ltd.
Infosys is the second largest IT services company in India with US$4.8bn
revenue and around 114,000 employees in FY10. Its services include application
development and maintenance, consulting services and package implementation,
business process management, infrastructure management, and testing services.
It provides these services to international clients through offshore development
facilities in India and other global centres. Infosys derives 66% of its revenue
from the US, 23% from Europe, and the rest from Asia Pacific.
Short-Term Rating Summary
We introduced a Short-term Buy rating on 8 Mar 2011 with expectations of
strong initial guidance for FY12 in April 2011. The stock is trading at an 8.8%
discount to TCS, and we believe the valuation gap will narrow, as we expect
stronger EPS growth in FY12.
Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Infosys Technologies Ltd.
Analysing guidance outperformance
Expectations for guidance have increased after Accenture results
We believe that expectations of a strong initial guidance from Infosys have risen
after strong numbers from Accenture in March 2011. We expect FY12 dollar
revenue guidance of 19-21% YoY growth, which is likely to translate into rupee
revenue growth guidance of 15-17% YoY, a 150bp margin decline and rupee EPS
of 11.4-13% YoY. In rupee terms, we expect an FY12 EPS guidance of Rs134.7-
136.7.
How much outperformance can we expect over guidance?
We expect Infosys to beat FY11 initial guidance by 8.9% and 6.9% in rupee
revenue and EPS, respectively. While one could argue that the extent of beat in
FY12 could be lower, we do not think it unreasonable to expect the average 8- 9%
beat seen on revenue and EPS guidance over the past 10 years.
Infosys has been more consistent in beating its initial EPS guidance than its
revenue guidance, beating the upper end of rupee revenue guidance by 8.4% and
EPS by 9.4% on average. We believe that Infosys tends to be more conservative in
its margin guidance than revenue, and we expect FY12 to be in line with this trend.
Valuation: maintain Buy; expect strong EPS growth in FY12
We expect strong demand, better pricing and lower attrition to help Infosys reduce
the margin impact of investments into sales & marketing, domain capabilities and
onsite hiring in FY12. We expect margin decline to be less than the 130bp seen in
9M FY11, and expect strong revenue and EPS growth in FY12. We maintain our
Buy/ Short-term Buy rating, based on our expectations of a strong guidance. Our
price target is based on a DCF methodology.
We expect margin conservatism in FY12 guidance
We expect more robust initial revenue guidance from Infosys in FY12 compared
with FY11 given the strong demand recovery seen in 2010 which has led to
better revenue visibility. NASSCOM estimates dollar revenue for the Indian IT
services sector to grow at 16-18% YoY in FY12. We expect Infosys to guide for
19-21% YoY growth in dollar revenue given its past history of guiding above
NASSCOM industry estimates. While we expect stronger initial revenue
guidance as compared to FY11, we expect Infosys to remain conservative in its
margin guidance.
Strong revenue, lower attrition, pricing stability to help
minimise margin decline
We anticipate a 150bp decline in EBITDA margins to be embedded into the
initial guidance for FY12 given the company’s stance that it would aggressively
invest into domain skills and onsite delivery. However, we have observed that
strong revenue growth and pricing stability have helped minimise margin impact
in the past. We believe strong revenue growth, pricing stability, an improvement
in service mix and lower attrition vis-à-vis FY11 should help Infosys minimise
the impact on operating margins. We expect Infosys to report a 50bp margin
decline in FY12 vs. 130bp in FY11.
Infosys has mostly outperformed revenue guidance
Infosys has consistently beaten its initial guidance for revenue and earnings
growth, with very few exceptions. On an average, the difference between initial
guidance and reported numbers has been around 8.5% in rupee revenue. In
dollar terms (which excludes the currency impact), Infosys has beaten its initial
revenue guidance more consistently, with recessionary periods being the only
exceptions, when the company performed below its initial guidance.
Beat in EPS guidance has been more consistent
Infosys seems to be more conservative in its EPS growth guidance, with the
company rarely missing its initial guidance. Average differential between initial
EPS growth guidance and reported numbers is also higher at 9.5%, which
implies relatively more conservatism in the margin guidance.
Infosys Technologies Ltd.
Infosys is the second largest IT services company in India with US$4.8bn
revenue and around 114,000 employees in FY10. Its services include application
development and maintenance, consulting services and package implementation,
business process management, infrastructure management, and testing services.
It provides these services to international clients through offshore development
facilities in India and other global centres. Infosys derives 66% of its revenue
from the US, 23% from Europe, and the rest from Asia Pacific.
Short-Term Rating Summary
We introduced a Short-term Buy rating on 8 Mar 2011 with expectations of
strong initial guidance for FY12 in April 2011. The stock is trading at an 8.8%
discount to TCS, and we believe the valuation gap will narrow, as we expect
stronger EPS growth in FY12.
Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
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