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UBS Investment Research
Infosys Technologies Ltd.
Weak Q4, conservative guidance
„ Q4 FY11 disappoints due to sequential volume decline
The primary disappointment in Q4 FY11 was the 1% QoQ decline in consolidated
volumes for the quarter, which led to a mere 1% growth in dollar revenue.
Utilisations dropped 420bp to 68% and the operating margin declined 120bp to
29%, despite a 2% QoQ improvement in consolidated pricing. Net profit at
Rs18.2bn (up 2.1% QoQ) was 4.5% lower than our estimate.
„ 300bp margin decline guidance for FY12 is unduly conservative
FY12 dollar revenue guidance (US$7.13-7.25bn, 18-20% YoY) was in line with
our expectation. The operating margin decline of 250-300bps was a negative
surprise, and seems unduly conservative given management’s view of being able to
contain margin decline within 50-100bp ex. currency. Infosys guided for rupee
EPS growth of +5.5-7.3% YoY to Rs126.1-128.2, lower than our estimate of
Rs134.7-136.7.
„ Board level changes announced, senior management changes likely
K Dinesh (co-founder) and TV Mohandas Pai (Head—Human Resources) will
resign from the company and board effective June 2011. The Infosys board will
discuss succession planning on 30 April, and we believe the company could
witness further changes in the management structure after the same.
„ Valuation: maintain Buy; removing Short-Term rating
We remove our Short-term Buy rating on completion of the FY12 guidance trigger.
We retain our Buy rating with a revised DCF-based price target of Rs3,550 (was
Rs3,700) to reflect EPS cuts of 7.6%/8% in FY12/13. We expect near-term
pressure on the stock due to news related to management changes, and recommend
buying on any dips.
Q 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.
Q 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.
Weak Q4, conservative guidance
„ Q4 FY11 disappoints due to sequential volume decline
The primary disappointment in Q4 FY11 was the 1% QoQ decline in consolidated
volumes for the quarter, which led to a mere 1% growth in dollar revenue.
Utilisations dropped 420bp to 68% and the operating margin declined 120bp to
29%, despite a 2% QoQ improvement in consolidated pricing. Net profit at
Rs18.2bn (up 2.1% QoQ) was 4.5% lower than our estimate.
„ 300bp margin decline guidance for FY12 is unduly conservative
FY12 dollar revenue guidance (US$7.13-7.25bn, 18-20% YoY) was in line with
our expectation. The operating margin decline of 250-300bps was a negative
surprise, and seems unduly conservative given management’s view of being able to
contain margin decline within 50-100bp ex. currency. Infosys guided for rupee
EPS growth of +5.5-7.3% YoY to Rs126.1-128.2, lower than our estimate of
Rs134.7-136.7.
„ Board level changes announced, senior management changes likely
K Dinesh (co-founder) and TV Mohandas Pai (Head—Human Resources) will
resign from the company and board effective June 2011. The Infosys board will
discuss succession planning on 30 April, and we believe the company could
witness further changes in the management structure after the same.
„ Valuation: maintain Buy; removing Short-Term rating
We remove our Short-term Buy rating on completion of the FY12 guidance trigger.
We retain our Buy rating with a revised DCF-based price target of Rs3,550 (was
Rs3,700) to reflect EPS cuts of 7.6%/8% in FY12/13. We expect near-term
pressure on the stock due to news related to management changes, and recommend
buying on any dips.
Q 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.
Q Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
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