Infosys: 1QFY12 result ::CLSA

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1QFY12 result
From Infosys, consensus expected a 1-2ppt raise in FY12 revenue growth
guidance, a 5%+QQ growth in 1Q revenues and 5-6%QQ revenue growth
guidance for 2Q. Not only were these elevated hopes dashed, Infosys also
confirmed some of the concerns which had emerged in the business due
to economic conditions and prudently kept its core revenue guidance
unchanged. This move makes Infosys’ revenue outlook more credible, not
conservative, in our view. Despite over 10% YTD under-performance
against the Sensex, an earnings downgrade cycle and the concomitant
risk to valuations will keep Infosys’ stock performance muted. We stay
cautious on all tech stocks and have no positive rating in the sector.
Core business growth outlook is the key dampener
0.7% beat of the June quarter guidance (guided $1,659m, actual $1,671m)
was the lowest June quarter beat of the last ten years. A healthier $-revenue
performance would have helped, especially after the big miss last quarter.
More importantly, a lack of upgrade in FY12 $-revenue growth outlook
(stayed at 18-20%YY) implies the street will be forced to cut its FY12 revenue
outlook. 5%QQ growth guidance for Sep quarter was also muted and much of
the onus of achieving the FY12 revenue outlook now rests on 2HFY12. We are
revising down our FY12 $-revenue growth to 21.9%YY from 22.4% earlier.
Margin performance muted; should improve through the year
297bpsQQ drop in Ebitda margins was better than company guidance but
below street expectations. We continue to estimate that Infosys’ Ebit margins
will be closer to 150bpsYY decline for FY12, not down 250bps as the company
is currently guiding. We believe there are certain missing parts in Infosys’
Sep-11 and FY12 guidance which create a gap between the revenue and
margin/net profit guidance, a gap that is a candidate of some positive
surprises on margins ahead. Lower visa costs, a favourable employee
pyramid, improvement in utilisations and likely reversal of some provisions
should drive margin uptick in the quarters ahead.
Underperform stays
Money-making in Infosys is contingent on confidence in FY13 street
expectations taking root. However, with quarters becoming in-line to misses
and outlook becoming riskier (in lieu of the weaker macro), we see multiple
pressure points for the stock. We see further downsides to FY13 consensus
EPS. In an earnings downgrade cycle, the seamless rollover of earnings which
a large section of the street is hoping for is unlikely to come through.
Valuations will likely remain under stress and a belief that Infosys’ average 1-
year forward multiple of 20x is flawed given the lower (mid-teens) earnings
growth trajectory and greater risk to those earnings.