Quick comments post discussions with Infosys ::EMkay

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Quick comments post discussions with Infosys

We spoke with Mr Sandeep Mahindroo, Head-Investor Relations to update ourselves on the business outlook ahead. We summarize the key takeaways below

Demand remains strong, co maintains it’s growth outlook

Our discussions with Infosys indicate demand remains strong across verticals/geographies with an improvement in deal pipeline as client budgets are up despite the macro uncertainty and mixed economic data points. Company indicated that within financial services vertical, tapering of M&A related integration work is being compensated by higher allocations towards regulatory compliance, risk management etc. It expects similar/higher than co average revenue growth in verticals like Financial Services, Retail and Manufacturing (co benefiting from ERP roll outs here) and although expects Telecom to trail co. wide growth (growth is expected to pick up in H2FY12 after nearly flat revenues in FY11). Co indicated that it was confident of it’s ‘higher than industry’ revenue growth guidance of 18-20% revenue growth and has seen improvement on pricing front FY12YTD (note that Infosys saw average price realizations by 2.8%/2.7%/2% in the past 3 quarters albeit also helped by some cross currency gains and has assumed FY12 pricing at Q4FY11 levels)   

Expect a moderate beat on Q1FY12 guidance

Infosys has guided for a 2.6-3.6% sequential revenue growth for June’11 quarter (~50 bps QoQ cross currency gains already incorporated in co’s guidance) and we expect a moderate beat on that number and thereby build in ~4.5% QoQ growth for June’11 quarter (both a fuctions of better volume growth as well as higher cross currency gains). We believe that an inline/moderately better than expected performance on revenue/margins will help soothe investor nerves after the sharp shock of March’11 results, however expect a much stronger Sep’11/Dec’11 quarters from the company as it focuses aggressively on demand opportunities after the internal rejig in Q1FY12  

See upsides to investor’s reset expectations

Post sharp cuts in street’s FY12/13 estimates in April’11, investor expectations from Infosys are more sanguine leaving room for positive surprises as we expect Infosys to beat both on revenues as well as operating margins (we expect ~23% US$ revenue growth and ~120 bps YoY margin decline V/s co guidance of 18-20% revenue growth and ~300 bps YoY margin decline) as company benefits primarily higher than expected volume growth and better pricing.

We maintain ACCUMULATE on Infosys with a March’12 TP of Rs 3,250. At CMP of Rs 2,880, Infosys trades at ~20.8x/17.5x FY12/13E earnings