Infosys: Lacklustre, not appalling ƒ 1Q ::BNP Paribas

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Lacklustre, not appalling
ƒ 1Q slightly below our view, no rev guidance raise as we expected
ƒ But onsite pick-up points to previously slow deals ramping up
ƒ Lowered expectations could help the stock in the next 12 months
ƒ Retain BUY, bear case is for the stock to stay flat over the year
Lacklustre, but not appalling
Infosys’s 1QFY12 results were marginally
below our expectations. Management
commentary centred on continuing macro
concerns, but there was no indication of
any impact of this on demand. Therefore,
while the 2Q guidance of 3.5-5% q-q USD
revenue growth was healthy, management
chose to keep the EPS outlook (flat to
declining q-q) characteristically
conservative despite the absence of
material margin headwinds. We lower our
FY12-14 revenue estimates by 2% and
EPS by 2-4% on the 1Q miss. Our FY12
estimates are now only slightly above
guidance. But despite our EPS cuts, we believe lowered expectations
could work in the stock’s favour and, barring any unusual macro shocks
(as in 2008), should ensure 15-20% returns over the next 12 months.
1Q marginally below our view, FY guidance unchanged
Infosys’s 1Q USD revenue growth of 4.3% q-q was marginally below our
expectation of 4.8%. EBIT margin of 26.1% (-290bps q-q) was 86bps
below our view, due to wage hikes and higher onsite revenue. EPS was
in line, but was helped by other income gains. The FY12 revenue growth
guidance was unchanged at 18-20%. Utilisation stayed at 75% (~5ppt
less than 1Q-3QFY11) and remains a margin lever, and could come into
play after the ongoing restructuring is completed in the coming weeks.
Retain BUY on a likely pick-up from 2Q
Going into the result season, we were cautious on Infosys in the near
term as we expected no FY12 revenue guidance increase (Of change
and transition, 27 June 2011) and no significant catalysts from the result
(Taking stock of the situation, 7 July 2011). As we noted at the time,
some previously signed large deals – especially in Europe (-2.6% q-q
constant currency) and telecom (-7.1% q-q) – had not ramped up as  
per plan. However, the 6.6% onsite volume increase in 1Q is indicative of
new project starts and suggests some of those issues are abating.
Bear case is for the stock to stay flat over 12 months
Following our estimate cuts, we reduce our DCF-based TP to INR3,370,
which implies an FY13E P/E of 20.0x, but we retain our BUY rating. We
still believe the bear case is for the stock to stay flat over the next year
(Reality check revisited, 21 June 2011) and lowered expectations post
the 1Q result should help. The risk can come from an unusual macro
shock that causes the stock to correct more than our DCF model can
justify. However, our economists foresee no such scenario.
HOW WE DIFFER FROM THE STREET
BNP   Consensus  % Diff
Target Price (INR)  3,370.00  3359.79  0.