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India Equity Research Reports, IPO and Stock News
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Not immune to risks
Downgrade to REDUCE, significant risk to Street FY13-14 EPS
Infosys will not be immune to likely prolonged macro weakness
See demand deteriorating by late FY12, cut FY13E EPS by 12%
Heightened risk aversion could lead to de-rating
Downgrade to REDUCE
We downgrade Infosys to REDUCE (from
Buy) and the Indian IT services sector
outlook to DETERIORATING. The stock
has declined 12% in August alone (vs a
7% drop in the Sensex), but we believe it
does not reflect a likely prolonged
anaemic macro growth scenario nor the
50% chance of a US recession that our
economics team forecasts. We believe a
well run company such as Infosys is
better prepared now than it was in 2008 to
face a recessionary situation, but this
does not take away from the fact that in
the event of an overall slowdown it will not be unaffected. Bloomberg
consensus calls for over 6% q-q revenue growth on average for the rest
of FY12, which we see at risk given the new macro data at hand.
Lowering estimates significantly
We now factor in a q-q flattish June 2012 quarter (1QFY13) and relatively
muted quarters on both sides (4QFY12 and 2QFY13). In a deteriorating
demand situation, we expect clients to ask for lower pricing, and thus, on
a constant-currency basis, see EBIT margin heading lower into FY13. As
a result, while we make relatively small revenue and EPS cuts for FY12,
we make significant cuts (9-11% revenue, 12-13% EPS) for FY13-14.
That said, we believe Infosys with its higher-than-peer EBIT margins is
better positioned to protect its earnings than most companies we cover.
Shouldn’t lose sight of long-term goals
Longer term, we would keenly watch how Infosys’s new vertical-based
organisation structure shapes up and the progress it makes on its longterm
goal of cutting down headcount dependence and achieving a 1/3-
1/3-1/3 revenue mix from transformation, operations and innovation (IP).
Peer Tata Consultancy (TCS IN) underwent reorganisation ahead of the
downturn in 2008-09 and emerged considerably stronger from it by
decentralising decision-making and empowering business unit heads.
Valuation – revisiting our DCF charts
Given heightened macro uncertainty and risk aversion, we expect stocks
to trade significantly below the level implied by our DCF model based on
long-term average risk assumptions (11.5% WACC, 5% terminal growth).
In 2008, large-cap Indian stocks fell as much as 40-65% below our fair
value estimates, so we set our TP for Infosys at a 20% discount. Our new
TP implies an FY13E P/E of 13.5x. Key risks to TP are: 1) unexpected
USD/INR depreciation (as seen in 2008-09) negating our EPS cuts, and
2) less-than-expected deterioration of the macro environment
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Not immune to risks
Downgrade to REDUCE, significant risk to Street FY13-14 EPS
Infosys will not be immune to likely prolonged macro weakness
See demand deteriorating by late FY12, cut FY13E EPS by 12%
Heightened risk aversion could lead to de-rating
Downgrade to REDUCE
We downgrade Infosys to REDUCE (from
Buy) and the Indian IT services sector
outlook to DETERIORATING. The stock
has declined 12% in August alone (vs a
7% drop in the Sensex), but we believe it
does not reflect a likely prolonged
anaemic macro growth scenario nor the
50% chance of a US recession that our
economics team forecasts. We believe a
well run company such as Infosys is
better prepared now than it was in 2008 to
face a recessionary situation, but this
does not take away from the fact that in
the event of an overall slowdown it will not be unaffected. Bloomberg
consensus calls for over 6% q-q revenue growth on average for the rest
of FY12, which we see at risk given the new macro data at hand.
Lowering estimates significantly
We now factor in a q-q flattish June 2012 quarter (1QFY13) and relatively
muted quarters on both sides (4QFY12 and 2QFY13). In a deteriorating
demand situation, we expect clients to ask for lower pricing, and thus, on
a constant-currency basis, see EBIT margin heading lower into FY13. As
a result, while we make relatively small revenue and EPS cuts for FY12,
we make significant cuts (9-11% revenue, 12-13% EPS) for FY13-14.
That said, we believe Infosys with its higher-than-peer EBIT margins is
better positioned to protect its earnings than most companies we cover.
Shouldn’t lose sight of long-term goals
Longer term, we would keenly watch how Infosys’s new vertical-based
organisation structure shapes up and the progress it makes on its longterm
goal of cutting down headcount dependence and achieving a 1/3-
1/3-1/3 revenue mix from transformation, operations and innovation (IP).
Peer Tata Consultancy (TCS IN) underwent reorganisation ahead of the
downturn in 2008-09 and emerged considerably stronger from it by
decentralising decision-making and empowering business unit heads.
Valuation – revisiting our DCF charts
Given heightened macro uncertainty and risk aversion, we expect stocks
to trade significantly below the level implied by our DCF model based on
long-term average risk assumptions (11.5% WACC, 5% terminal growth).
In 2008, large-cap Indian stocks fell as much as 40-65% below our fair
value estimates, so we set our TP for Infosys at a 20% discount. Our new
TP implies an FY13E P/E of 13.5x. Key risks to TP are: 1) unexpected
USD/INR depreciation (as seen in 2008-09) negating our EPS cuts, and
2) less-than-expected deterioration of the macro environment
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