Infosys Technologies - Rebasing expectations post 1Q miss:: Macquarie Research

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Infosys Technologies
Rebasing expectations post 1Q miss
Event
 We reduce our FY12 and FY13 revenue growth and margin forecasts for
Infosys post disappointing 1Q results. The miss in the April – June period was
not as bad as the previous quarter but leaves us with less confidence on the
growth and margin trajectory for the company. The stock is down 19% CYTD
and further pressure over the next three months cannot be ruled out until we
see strong quarterly results. We maintain Outperform with reduced TP of
Rs3,150 (13% upside potential).
Impact
 What’s built into our revised estimates? We now estimate FY12 US$
revenue growth of 21% (vs. guidance of 18-20%). Following lower revenue
growth and reduced margin assumptions (now baking in a 200bp YoY
decline) our FY12E EPS stands at Rs133. Our revised FY13 EPS estimate is
Rs155, that builds in 18% US$ revenue growth and flat margins vs. FY12.
(Please see Pages 2-3 for our detailed estimate change table and analysis).
 Pricing not moving up – derailing our earlier investment thesis. Our
earlier forecasts for street-high earnings were based on sequential pricing
improvement helping the company to outperform its full-year FY12 revenue
growth guidance of 18-20%. Though 1Q blended pricing was flat QoQ we
were looking for positive momentum. In the absence of strong demand signals
and 1Q trend we have kept pricing flat for the next three quarters.
 Utilisation remains low – could spring positive surprise. Infosys
maintained its utilisation (ex-trainees) at 73% for the IT Services business for
the second consecutive quarter. Management maintain that they are keeping
utilisation low to create capacity for potential growth surprises. Strong gross
additions in the next quarter (12K employees) suggest a healthy deal pipeline.
 Management restructuring behind us. The company has completed the
bulk of its organisational change. Management reiterated on the call that the
transition to a new structure has not had any material impact on growth and
we could look forward to that yielding results in the coming quarters.
Earnings and target price revision
 Our revised FY12E and FY13E EPS is Rs133 (down 7%) and Rs155 (down
13%) respectively. Our new DCF-based TP is Rs3,150 (from Rs3,650 earlier).
Price catalyst
 12-month price target: Rs3,150.00 based on a DCF methodology.
 Catalyst: Margin improvement led by strong volume and pricing growth.
Action and recommendation
 Remain cautious on near-term volatility. We recognise that successive
quarters of missing street expectations would rebase street estimates for
Infosys. Even so, we maintain our OP recommendation from a 12-month
perspective and would be looking to accumulate the stock on any correction