Infosys Technologies: Marginal outperformance on guidance in 1Q: Nomura

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Marginal outperformance on guidance in 1Q
2Q revenue guidance to
address investor concerns on
demand issues at Infosys


1Q FY12F: 4.6% revenue growth, 250bp margin decline
We expect Infosys to report USD revenue growth of 4.6% q-q (vs
guidance of 3.6%) for 1Q FY12F, slower than our expectations for TCS
and Cognizant (6-8% q-q). We believe margins will decline by 250bps q-q
on account of wage hikes, but this decline will be lower than management
guidance of 300bps. We expect Infosys to marginally up its FY12F
guidance for USD revenue growth to 19-21% y-y and EPS to north of
Rs130. In our view, the 1Q FY12F results and FY12F guidance should
ease investor fears of any fundamental demand issues specific to Infosys
or continued impact of management restructuring.
Action: Top pick in the sector; reiterate BUY
Infosys is our top pick in the sector given its: 1) high discretionary skew,
with 30% of revenues coming from package implementation and products;
2) lower volume requirement (17% in FY12F) to meet revenue growth
expectations of 24% given positive pricing flow through from FY11 and
incremental mix based pricing increases; and 3) its attractive valuation at
~17x FY13F earnings (15% below the historical average one-year forward
P/E). We expect 20% earnings growth CAGR over FY11-13F and reiterate
our BUY call and TP at INR3,450.
Catalyst: Revenue growth guidance in excess of 6% q-q for 2Q FY12F
We believe that revenue growth guidance of more than 6% q-q for 2Q
FY12F and continued positive pricing momentum would be viewed
positively by the street.