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EARNINGS REVIEW
Infosys Ltd. (INFY.BO)
Buy Equity Research
Below expectations: ‘cautious’ guidance disappoints; maintain Buy
What surprised us
Infosys posted 1QFY12 revenues of Rs74.85bn (up 3.2% qoq) and net
income of Rs17.2bn (8.4% above guidance), in line with Bloomberg
consensus and 1.7%/4.5% below GSe. EBIT margin compressed by 290 bp
qoq (GSe at -110 bp), due to more hiring (9.9k gross adds) and utilization
(incl. trainees) below 70%. Telecom vertical continues to drag (-8% qoq),
due to a spending decline by one major EU client. EU fell 0.6% qoq,
suggesting weaker demand in the region. Volume growth rebounded at
+4% qoq (-0.9% qoq in 4QFY11). Unbilled revenues reached Rs14bn, 18.6%
of 1Q sales (highest ever), indicating a buffer for the leading quarters.
Guidance: INFY maintained its 18%-20% US$ revenue growth guidance,
preferring to be cautious due to macro uncertainties despite no apparent
cuts in client budgets. However, it raised INR EPS guidance to Rs128.20-
Rs130.08, and EBIT margin guidance to decline 250 bp for FY12 (vs. 300 bp
earlier). For 2QFY12, it guided for 3.5%-5.0% qoq US$ revenue growth.
What to do with the stock
We believe that despite meeting consensus expectations, lack of upward
revision in US$ revenue guidance for FY12 and muted 2QFY12 (strongest
quarter seasonally) have not been taken positively by the market.
However, we see no significant downside risk to consensus FY12 EPS. We
cut our revenue/EPS estimates 3%-5% for FY12E-FY14E on a lower 1Q runrate and cautious commentary by the management, leading to our new 12-
m Director’s Cut-based TP of Rs3,330 (from Rs3,520), implying 19%
potential upside. We maintain our Buy. Risks: slowdown in tech spending
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