Buy Infosys - Conservatism to the fore ::RBS

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Infosys
Conservatism to the fore
While 1Q12 results were broadly in line with our forecasts, we believe 2Q12/FY12
guidance builds in extreme conservatism, given strong hiring signals, continued
deal flow and no material change in client budgets. We see the correction after
results as an opportunity to Buy


We see the stock correction as a reaction to ultra-conservative guidance; Buy
Infosysís US$ revenue growth of 4.3% qoq and an EBITDA margin drop of 300bp qoq
broadly met our estimates, but were lower than street expectations. Infosys maintained FY12
US$ revenue growth guidance of 18-20% (constant currency growth rate guidance
marginally down 0.5%) despite beating its 1Q12 guidance (2.5-3.5% qoq growth), while its
EPS revision was restricted to outperformance in 1Q12. We believe this reflects extreme
conservatism due to macro economic uncertainty, although management clarified that client
budgets are unaffected as of now. We modestly trim our FY12/13 EPS forecasts 1% each,
making small adjustments to revenues and the resulting impact on margins. We view the
stock correction after the results as a buying opportunity, with organisational restructuring
and staffing issues largely behind us. A significant macro economic shock remains a key risk
to earnings and stock performance.
Disconnect between guidance and hiring trends/deal flow
Infosys guided for 3.5-5.0% qoq US$ revenue growth in a seasonally strong 2Q12, v 1Q12
qoq growth of 6.7% ex-telecom (client specific issues) and products. The guidance is in
contrast to aggressive hiring (9,900 gross adds vs 6,500 guided in 1Q12 and a 12,500 hiring
target for 2Q12) despite low utilisation, which we believe anticipates volume ramp-up. Strong
growth in onsite volumes (6.8% qoq) is typically a precursor to larger offshore ramp-up.
Hence, the 2Q12 operating margin could surprise positively vs the flat qoq guided trend.
1Q12 results: broadly met our expectation, despite significant headwind from telecom
1Q12 revenue of US$1.67bn rose 4.3% (3.1% in constant currency) vs guidance of 2.5-
3.5%, driven by IT Services volume growth of 4.0% qoq. The Communications/Services
vertical revenues dropped 7.1% qoq due to a material revenue drop with a large European
telecom client. The EBITDA margin fell 300bp qoq to 29.1%, primarily due to wage hikes.
Other income was up 6.7% qoq to Rs4.43bn, with forex gains of Rs450m (4Q11:Rs410m).
Consequently, PAT fell 5.3% qoq to Rs17.22bn