Infosys -On the mark, but no sparks :: Standard Chartered Research,

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 Modest 1Q12, but lacked sparks to meet consensus’
heightened expectations.
 We see 1H12 as a ‘WIP’ for Infosys as restructuring
plays outs; though no risk to our below consensus 23%
FY12 US$ revenue growth target.
 We also maintain our more cautious FY12/FY13 margin
stance – note, pricing recovery remains shallow and
campus wage hike cycle is a key risk to FY13 margin.
 No change to our FY12/13 EPS estimates; but expect
consensus to trend down.
 Stay OP for mid-range horizon with 13% upside.



1Q12: broadly in-line; pricing recovery remains weak.
Consolidated revenue grew 4.3% qoq to US$1.7bn as BPO
grew a slow 0.6% and product sales dropped 7% qoq. 4%
volume growth was marginally below our estimate, even as
realisation pulled up 1.2% (flat in constant currency). Fall in
EBITDA margin was a sharper 297bp (SCSI est. -241bp)
given the scheduled wage hike (-250bp hit) as onsite
delivery went up (+0.8% qoq) and INR strengthened (-40bp
qoq). PAT of Rs17.2bn was broadly in-line, helped by
Rs450m FX gain and higher interest income (+7.5%).
We see minimal risk to our modest FY12 forecasts. We
expect financial impact of the new structure only in 2H12,
thus, the ‘conservative’ 2Q 3.5-5.0% US$ revenue growth
guidance. We expect modest out-performance in deals –
note 6 US$50m+ deal wins (3 US$100m+) in 1Q; 3 large
deals set for closure in early 2Q, according to management.
But street may have to tone down expectations. Pricing
recovery remains weak (-1.6%/-0.3% qoq for onsite/
offshore); Infosys indicated a slower decision making on
discretionary spend. Thus, the c10% CQGR ask-rate over
2Q-4Q to meet consensus’ current FY12 EPS estimates, at
six-year high gap versus guidance, could be tough.
Retain OUTPERFORM. But returns likely back-ended.
We maintain our estimates, moderated recently (See
Infosys: Rationalizing expectations dated 20 June, 2011).
We see limited downside post the stock’s underperformance
(-11%) over last 3 months. Infosys’ US$3.8bn cash balance
also helps. However, near term, expectation mismatches
and a continued volume underperformance relative to TCS
could weigh on valuations and keep the stock movement
ranged, in our view. While we keep a watch, we believe it is
early to build in volume risks from macro factors.