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Infosys Technologies
Reuters: INFY.BO Bloomberg: INFO IN Exchange: BSE Ticker: INFY
June-Q results review
Retaining Buy with a revised target price of INR3,200
We cut our FY12 revenue and earnings estimates for Infosys by 2.4% and 3.7%,
respectively. This follows a decrease in our offshore volume and realization
forecast. Though the demand environment for Infosys continues to be strong, the
perceived risk to back-ended revenue growth expectations from a volatile
macroeconomic environment and earnings CAGR of 18.5% (vs. 21.5% for FY11-
13E) over FY12-14E, we have lowered our target PE multiple to 21 (vs. 25).
Despite this, we forecast 15% upside potential to the stock and retain Buy.
In line June-Q
Infosys reported revenues of USD1,671m (+4.3% qoq, 0.7% below our estimate).
The overall reported pricing increased 1.2% qoq (vs. our estimate of 0.5% qoq)
and volume growth was 3.2% qoq (vs. our estimate of 4% qoq). EBIT margins at
26.1% were down 291bps qoq (171bps lower than our estimate). This was
predominantly on account of a higher proportion of the growth onsite and no
significant change in utilisation ex-trainees. Key negatives: continuation of qoq
revenue declines in the telecom vertical and declines in revenues from Europe.
Key positives: high onsite volume growth is indicative of new project starts and
continuation of growth momentum in the medium term.
Muted guidance weighs on the stock in the interim
Though a back-ended revenue growth expectation from Infosys is not unusual, we
believe the unchanged FY12E US dollar revenue growth guidance will weigh on
the stock in the interim. Thus, we believe investors should wait for additional data
points, suggesting (1) improvement in the global macroeconomic environment, (2)
improvement in client spending, and (3) reasonable increase to FY12E US dollar
revenue and earnings growth guidance at end-2QFY12.
Valuation and risks
We value Infosys at 21x FY12E/06 (vs. 25x) and a PEG of 1.1. Key downside risks:
(1) greater-than-expected appreciation of the rupee, (2) global vendor competition,
and (3) stronger political rhetoric against outsourcing affecting client spending.
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