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We believe Infosys is likely to lower its FY12 revenue growth guidance at the Q2FY12 result announcement (mid-
October 2011). It guided for 18-20% USD revenue growth for FY12 at the beginning of the fiscal and maintained the
same post the Q1 results. The management has indicated that FY12 would be an evenly paced year in terms of
quarterly revenue growth, in contrast to a usually stronger Q1/Q2. However, the FY12 guidance implies a stronger 2H.
Even if revenues meet the higher end of the Q2 guidance, they would still have to grow by ~11% hoh in 2HFY12 (~6%
CQGR over Q2-Q4FY12) to meet the higher end of the FY12 outlook. Given the global economic weakness, we see this
ask rate optimistic and expect Infosys to lower its projection by ~2% to 16-18% to factor in worsening macro conditions
in its key markets in the past 2-3 months. Most economic indicators are increasingly pointing to a potential slowdown in
developed economies, which threatens to decelerate tech spending in 2012. In this backdrop, we believe that the
expectation of a strong H2 will not play out. We reiterate our cautious stance on IT Services and recommend sticking to
top names. We maintain Outperformer on Infosys, with a 12-month price target of Rs2,800.
Infosys’s current FY12 guidance
Infosys’s revenue guidance for FY12 builds 18-20% yoy growth in USD revenues to US$7,130m-7,250m. We note that
this was shared during the FY11 results and maintained at the Q1FY12 earnings announcement. While H1 is usually
stronger than H2, the management expects FY12 to be relatively evenly paced this fiscal. The guidance for Q2FY12 and
FY12 implies ~12% revenue growth in H2FY12 after ~8% growth in H1FY12
Why a downward revision is in the offing
We expect the company to lower its FY12 USD revenue growth guidance by ~2% to 16-18% from 18-20% due to the
worsening macro-economic landscape and weaker IT spend in 2012E.
Increased macro uncertainties
A quick look at the key global indicators points to increased uncertainty both in the US and developed markets. The
following table summarizes the incrementally adverse news flow from key developed markets.
Exhibit 2: Indicators/ events pointing to worsening macro-environment
Indicator Highlights
US GDP growth rate During Q1/ Q2CY11, the US GDP growth rate was muted at 0.4% and ~1% respectively
Euro zone/ UK GDP growth rate UK/ Euro zone GDP growth rate has also been muted at a dismal 0.2%
US: ISM manufacturing index Aug’11 ISM manufacturing index declined for the 3rd consecutive month to 50.6 from 55.3 in Jun’11
US: Non-ISM manufacturing index Aug’11 non-ISM Manufacturing index came in at 53.3, lower than the highs of 59.7 in Feb’11
US: Retail sales In Aug’11, retail sales (ex auto and fuel) was largely flat, growing by just 0.1%
US: Unemployment rate Unemployment rate was a high 9%+
S&P US credit rating downgrade In Aug’11, S&P downgraded US credit rating from AAA to AA+ due to weakened effectiveness,
stability and predictability of American policy-making and political institutions
Rating downgrades across Europe In Sep’11, Moody’s downgraded French banks Societe Generale SA and Credit Agricole SA;
Fitch maintained its AA+ rating on Spain but revised its outlook to negative; S&P downgraded its
rating on Italy by one notch to A/A-1 while maintaining its negative outlook
Source: IDFC Securities Research
(Refer to our sector update, Butterfly Effect, dated 23 August 2011, for details on macro-economic headwinds for the
Indian IT services sector)
Budget flush unlikely in the December quarter
In a good year, global corporates typically spend residual IT budgets in the last quarter of their fiscal year (usually the
same as the calendar year). However, in challenging years, corporates go into cash conservation mode, pushing actual
IT spends lower than the budgeted amount. Our discussion with the Infosys management indicates that IT spend in the
past few months was a little lower than budgeted levels. This time, however, we see a budget flush in the December
quarter unlikely as spending plans would be prudent due to the worsening macro-economic concerns.
March quarter might see further pain
Clients usually decide their IT budgets during November-January, which starts reflecting in the financials of IT services
companies from the March quarter. In light of the increasingly adverse macro indicators, we believe CY12 tech budgets
will be muted, with cautious IT spending in the first few months of the year. While clients should largely maintain their
“run-the-business” spending, they are likely to push for lower pricing and a higher offshore mix for the existing
business. Also, discretionary spend is likely to see slower decision-making and delayed ramp-up of projects. Therefore,
we expect weak revenue growth for Infosys even in the March quarter.
Our view
We expect clients to prune tech spending due to the economic slowdown, which would adversely affect Indian IT
services companies’ business performance. While large companies like Infosys are better placed than most peers, we
still expect revenue growth to be affected. In view of this, we expect Infosys to lower its FY12 USD revenue growth
outlook by ~2% though it is likely to meet its revenue projections for Q2FY12. We maintain our cautious stance on the
sector, but expect tier-1 companies to fare relatively better and recommend sticking to the larger players. We maintain
Outperformer on Infosys, with a 12-month price target of Rs2,800.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We believe Infosys is likely to lower its FY12 revenue growth guidance at the Q2FY12 result announcement (mid-
October 2011). It guided for 18-20% USD revenue growth for FY12 at the beginning of the fiscal and maintained the
same post the Q1 results. The management has indicated that FY12 would be an evenly paced year in terms of
quarterly revenue growth, in contrast to a usually stronger Q1/Q2. However, the FY12 guidance implies a stronger 2H.
Even if revenues meet the higher end of the Q2 guidance, they would still have to grow by ~11% hoh in 2HFY12 (~6%
CQGR over Q2-Q4FY12) to meet the higher end of the FY12 outlook. Given the global economic weakness, we see this
ask rate optimistic and expect Infosys to lower its projection by ~2% to 16-18% to factor in worsening macro conditions
in its key markets in the past 2-3 months. Most economic indicators are increasingly pointing to a potential slowdown in
developed economies, which threatens to decelerate tech spending in 2012. In this backdrop, we believe that the
expectation of a strong H2 will not play out. We reiterate our cautious stance on IT Services and recommend sticking to
top names. We maintain Outperformer on Infosys, with a 12-month price target of Rs2,800.
Infosys’s current FY12 guidance
Infosys’s revenue guidance for FY12 builds 18-20% yoy growth in USD revenues to US$7,130m-7,250m. We note that
this was shared during the FY11 results and maintained at the Q1FY12 earnings announcement. While H1 is usually
stronger than H2, the management expects FY12 to be relatively evenly paced this fiscal. The guidance for Q2FY12 and
FY12 implies ~12% revenue growth in H2FY12 after ~8% growth in H1FY12
Why a downward revision is in the offing
We expect the company to lower its FY12 USD revenue growth guidance by ~2% to 16-18% from 18-20% due to the
worsening macro-economic landscape and weaker IT spend in 2012E.
Increased macro uncertainties
A quick look at the key global indicators points to increased uncertainty both in the US and developed markets. The
following table summarizes the incrementally adverse news flow from key developed markets.
Exhibit 2: Indicators/ events pointing to worsening macro-environment
Indicator Highlights
US GDP growth rate During Q1/ Q2CY11, the US GDP growth rate was muted at 0.4% and ~1% respectively
Euro zone/ UK GDP growth rate UK/ Euro zone GDP growth rate has also been muted at a dismal 0.2%
US: ISM manufacturing index Aug’11 ISM manufacturing index declined for the 3rd consecutive month to 50.6 from 55.3 in Jun’11
US: Non-ISM manufacturing index Aug’11 non-ISM Manufacturing index came in at 53.3, lower than the highs of 59.7 in Feb’11
US: Retail sales In Aug’11, retail sales (ex auto and fuel) was largely flat, growing by just 0.1%
US: Unemployment rate Unemployment rate was a high 9%+
S&P US credit rating downgrade In Aug’11, S&P downgraded US credit rating from AAA to AA+ due to weakened effectiveness,
stability and predictability of American policy-making and political institutions
Rating downgrades across Europe In Sep’11, Moody’s downgraded French banks Societe Generale SA and Credit Agricole SA;
Fitch maintained its AA+ rating on Spain but revised its outlook to negative; S&P downgraded its
rating on Italy by one notch to A/A-1 while maintaining its negative outlook
Source: IDFC Securities Research
(Refer to our sector update, Butterfly Effect, dated 23 August 2011, for details on macro-economic headwinds for the
Indian IT services sector)
Budget flush unlikely in the December quarter
In a good year, global corporates typically spend residual IT budgets in the last quarter of their fiscal year (usually the
same as the calendar year). However, in challenging years, corporates go into cash conservation mode, pushing actual
IT spends lower than the budgeted amount. Our discussion with the Infosys management indicates that IT spend in the
past few months was a little lower than budgeted levels. This time, however, we see a budget flush in the December
quarter unlikely as spending plans would be prudent due to the worsening macro-economic concerns.
March quarter might see further pain
Clients usually decide their IT budgets during November-January, which starts reflecting in the financials of IT services
companies from the March quarter. In light of the increasingly adverse macro indicators, we believe CY12 tech budgets
will be muted, with cautious IT spending in the first few months of the year. While clients should largely maintain their
“run-the-business” spending, they are likely to push for lower pricing and a higher offshore mix for the existing
business. Also, discretionary spend is likely to see slower decision-making and delayed ramp-up of projects. Therefore,
we expect weak revenue growth for Infosys even in the March quarter.
Our view
We expect clients to prune tech spending due to the economic slowdown, which would adversely affect Indian IT
services companies’ business performance. While large companies like Infosys are better placed than most peers, we
still expect revenue growth to be affected. In view of this, we expect Infosys to lower its FY12 USD revenue growth
outlook by ~2% though it is likely to meet its revenue projections for Q2FY12. We maintain our cautious stance on the
sector, but expect tier-1 companies to fare relatively better and recommend sticking to the larger players. We maintain
Outperformer on Infosys, with a 12-month price target of Rs2,800.
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