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Infosys Ltd. (INFY.BO)
Buy Equity Research
Near-term fundamentals intact, currency upside remains; Buy
What's changed
Infosys reported inline 2Q results, but its raise in FY12 EPS guidance by 11.6%
and no change in volume growth expectations came as positive surprises.
Mgmt stated they have not seen any budget cuts by customers yet and
growth in FY12 should be more evenly spread out across quarters. However,
2012 remains uncertain and budgets finalization by 1Q12 will give clarity on
2012’s outlook. We maintain Buy, forecasting 17% EPS CAGR over FY11-14E.
Implications
1) INFY’s FY12 USD revenue guidance implies a sequential run-rate of 4.3% for
the next two quarters, similar to the growth rate in 1H. We believe that with
recovery from a weaker 1H11 (1H witnessed ramp down in verticals like
telecom) and with organization restructuring being over, INFY should be able to
achieve this run-rate, despite 2H being a seasonally weak period. 2) BFS vertical
(ex-Finacle) was up 7.6% qoq, despite growth concerns; INFY’s top client (a US
bank) grew at 6.8% qoq, implying positive read-across for TCS (TCS.BO, Neutral,
Oct 12: Rs1,079.35). 3) We expect the Street to remain below INFY’s FY12 EPS
guidance (of Rs143.02 - Rs145.26) due to high volatility in INR, first time since
2007. This could provide upside risk to Street estimates, if INR stays at current
levels. Our model now assumes USD at Rs46, inline with our ECS team’s
forecast. Current spot rate (i.e. Rs48) implies +11% variance to our FY13E EPS.
Valuation
We retain our Buy rating and raise our FY12E-FY14E EPS by 1%-3% post inline
2Q results. Hence, we revise our 12-m Director’s Cut-based TP to Rs3,050/
US$66.3 (from Rs3,004/US$66.8, ADR TP lower on weaker INR assumption),
implying 14%/26% upside. INFY is trading at 16.7x on FY13E P/E, a 20% discount
to its 8-year historical average and 10% discount to TCS. INFY is one of the 10
companies identified in the GS India Handbook (Oct 5, 2011), with 1
st
quartile
sustainable cash returns and that appear undervalued.
Key risks
Significant slowdown in tech spending in US/EU, INR appreciation.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Ltd. (INFY.BO)
Buy Equity Research
Near-term fundamentals intact, currency upside remains; Buy
What's changed
Infosys reported inline 2Q results, but its raise in FY12 EPS guidance by 11.6%
and no change in volume growth expectations came as positive surprises.
Mgmt stated they have not seen any budget cuts by customers yet and
growth in FY12 should be more evenly spread out across quarters. However,
2012 remains uncertain and budgets finalization by 1Q12 will give clarity on
2012’s outlook. We maintain Buy, forecasting 17% EPS CAGR over FY11-14E.
Implications
1) INFY’s FY12 USD revenue guidance implies a sequential run-rate of 4.3% for
the next two quarters, similar to the growth rate in 1H. We believe that with
recovery from a weaker 1H11 (1H witnessed ramp down in verticals like
telecom) and with organization restructuring being over, INFY should be able to
achieve this run-rate, despite 2H being a seasonally weak period. 2) BFS vertical
(ex-Finacle) was up 7.6% qoq, despite growth concerns; INFY’s top client (a US
bank) grew at 6.8% qoq, implying positive read-across for TCS (TCS.BO, Neutral,
Oct 12: Rs1,079.35). 3) We expect the Street to remain below INFY’s FY12 EPS
guidance (of Rs143.02 - Rs145.26) due to high volatility in INR, first time since
2007. This could provide upside risk to Street estimates, if INR stays at current
levels. Our model now assumes USD at Rs46, inline with our ECS team’s
forecast. Current spot rate (i.e. Rs48) implies +11% variance to our FY13E EPS.
Valuation
We retain our Buy rating and raise our FY12E-FY14E EPS by 1%-3% post inline
2Q results. Hence, we revise our 12-m Director’s Cut-based TP to Rs3,050/
US$66.3 (from Rs3,004/US$66.8, ADR TP lower on weaker INR assumption),
implying 14%/26% upside. INFY is trading at 16.7x on FY13E P/E, a 20% discount
to its 8-year historical average and 10% discount to TCS. INFY is one of the 10
companies identified in the GS India Handbook (Oct 5, 2011), with 1
st
quartile
sustainable cash returns and that appear undervalued.
Key risks
Significant slowdown in tech spending in US/EU, INR appreciation.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
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