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Infosys Technologies (INFO)
Technology
On balance, positive. Infosys reported an in-line operational quarter; however,
substantial revision in earnings guidance, led by Rupee depreciation, surprised us
positively. After a series of execution hiccups, Infosys is finally getting back on track.
New organization structure with reduced number of P&Ls, people movement across
roles, greater volume focus, aggressive deal participation, and investments in consulting
are important enablers that will lead to catch up with peers on revenue growth. We
increase FY2012/13E EPS estimate by 5%/1% and TP to Rs3,000 (Rs2,900 earlier). BUY.
Volume growth encouraging after a long time
Revenue momentum at Infosys is finally building up after a series of execution challenges over the
past few quarters and ‘lack of active participation in deals’ which weakened the order book.
Infosys reported decent volumes growth of 4.5% in 2QFY12. Revenues growth of 4.5% qoq (5%
constant currency) to US$1,746 mn was broad-based barring very strong qoq growth in the lowbase
healthcare vertical. EBITDA margins increased by 190 bps qoq to 31% due to Rupee
depreciation and offshore pricing gain; note Infosys has not utilized any levers to shore up margins.
Net income of Rs19.1 bn (+11% qoq, +10% yoy) was marginally lower than our estimate.
Revenue guidance unchanged on constant currency, a strong indicator
Infosys reduced FY2012E revenue guidance by 1% to 17-19% from 18-20% earlier. Confidence
of sustained growth reflects in the strong 3.2-5.4% qoq growth guidance for 3Q and the implied
3.3-5.6% growth in 4Q. Infosys could have very easily assumed a flat March quarter citing macro
uncertainty, that is has chosen not do so reflects the strength of demand environment for offshore
players. EPS guidance revision to Rs143-145 from Rs128-130 is primarily Rupee driven; guidance is
based on Re/US$ rate of 48.98 for 2H. We believe that the company has adequate buffers to
deliver EPS in this range even if Rupee was to appreciate a tad from these levels.
Getting execution engine back on track; BUY for a turnaround
Infosys’ performance has been impacted by a series of execution challenges including staffing, lack
of flexibility in strategic contracts and reorganization distractions (these concerns were construed
as business model challenges by the Street). However, several factors indicate that turnaround is
around the corner for Infosys including (1) strong deal pipeline and wins and (2) positive
management commentary, (3) improvement in utilization rates and reduction in attrition rates and
(4) strong recruitment. Foundation for turnaround was led by reorganization which has
accelerated decision making, tightening of sales execution, increased flexibility on deal structures
and aggressive deal participation. We revise FY2012/13E EPS to Rs141/162 from Rs134/160 earlier;
our estimates are based on a Re/US$ rate of 46.6/45.6. BUY; TP revised to Rs3,000/share.
What could have prompted strong back-ended revenue growth guidance?
Infosys’ strong 3.2% to 5.4% revenue growth guidance for 3QFY12 and implied 3.3% to
5.6% guidance for 4Q has surprised us and possibly the Street. Discretionary spending is at
the weakest, especially in the March quarter. In fact, Infosys has not grown volumes higher
than 5.5% even once in the past five years. This does beg a question on what could have
prompted such a strong 2H guidance when the company struggled to achieve upper end of
guidance in a seasonally strong 2QFY12 (and has missed or barely achieved upper end of the
guidance for the past three quarters). We believe that the following factors could have
prompted this
�� Strong contract wins which may ramp up in 3QFY12E and may spill over to 4QFY12E.
�� Element of seasonality may have been reduced due to weak growth in 1HFY12;
magnitude of wind down of discretionary projects would have a relatively lower impact
on revenue growth in 2HFY12E.
�� A new normal wherein guidance is realistic and performance within the range is
considered acceptable within the company.
�� Setting the bar high for the organization through an aggressive guidance after three
quarters of tepid, weaker-than-peers growth.
We model revenue growth of 18.5% for FY2012E.
Healthy pricing increase
Infosys’ offshore pricing increased 3.1% qoq, 3.5% in constant currency. Admittedly it is
difficult to take a view on pricing trends on just one quarter data; there could be various
factors that may lead to volatility in pricing. However, it is encouraging that pricing on a yoy
basis has also increased by a material 9%. We are also encouraged by revision in margin
decline guidance to 50-100 bps from 300 bps decline at the beginning of the year with part
of the revision led by operational efficiencies. We also note that the company has not pulled
in any levers to manage margins in 2QFY12. We believe that new strategic deals may
not be margin dilutive even if Infosys is relatively aggressive on contract terms or
pricing, if the execution engine is managed efficiently.
Broad-based growth after a long time
Infosys’ growth over the past few quarters has been impacted by some problem verticals.
Such problem verticals use up management bandwidth to fix the challenges. Broad-based
growth in 2QFY12 is encouraging in our view with even the perennial problem vertical of
telecom reporting healthy 2.5% qoq growth.
Key assumptions for FY2012E guidance
Infosys has maintained its earlier assumptions on volume and pricing in its revised FY2012E
guidance. The 90 bps reduction in US$ revenue growth guidance is purely on account of
revised cross-currency assumptions. The sharp 10%+ increase in FY2012E EPS guidance is
primarily driven by revised Re/US$ assumptions. This also reflects in the revised margin
decline guidance – now at 50-100 bps yoy versus 250 bps earlier.
Key revision to our estimates
We have revised our FY2012E/13E EPS estimates upwards to Rs141/162 from Rs134/160
earlier. Our estimates are based on a Re/US$ rate of 46.6 for FY2012E and an unchanged
Rs45.6 for FY2013E. We note that we build in Re/US$ assumption of Rs47.5 for 2HFY12E
versus Rs48.98 assumed by the company. We have broadly maintained our revenue growth
assumption for FY2012E and FY2013E – at 18.5% and 15%, respectively. Our margin
assumptions stand revised upwards by 70 bps and 30 bps for FY2012E and FY2013E –
31.3% and 30.9%, respectively.
Other details
Infosys maintained its gross hiring guidance of 45,000 for FY2012E. It hired a gross
15,352 employees in 2QFY12 taking the total in 1HFY12 to 25,274.
The company has made 23,000 campus offers till date for FY2013E.
Outstanding hedges at end-June 2011 stood at US$742 mn, flat qoq.
Attrition on a quarterly annualized basis came down to 20.6% from 21.5% in the
previous quarter – this is still outside the company’s comfort zone.
The company has combined all its platform-based solutions under one umbrella and
launched these under a new brand – Infosys EDGE.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFO)
Technology
On balance, positive. Infosys reported an in-line operational quarter; however,
substantial revision in earnings guidance, led by Rupee depreciation, surprised us
positively. After a series of execution hiccups, Infosys is finally getting back on track.
New organization structure with reduced number of P&Ls, people movement across
roles, greater volume focus, aggressive deal participation, and investments in consulting
are important enablers that will lead to catch up with peers on revenue growth. We
increase FY2012/13E EPS estimate by 5%/1% and TP to Rs3,000 (Rs2,900 earlier). BUY.
Volume growth encouraging after a long time
Revenue momentum at Infosys is finally building up after a series of execution challenges over the
past few quarters and ‘lack of active participation in deals’ which weakened the order book.
Infosys reported decent volumes growth of 4.5% in 2QFY12. Revenues growth of 4.5% qoq (5%
constant currency) to US$1,746 mn was broad-based barring very strong qoq growth in the lowbase
healthcare vertical. EBITDA margins increased by 190 bps qoq to 31% due to Rupee
depreciation and offshore pricing gain; note Infosys has not utilized any levers to shore up margins.
Net income of Rs19.1 bn (+11% qoq, +10% yoy) was marginally lower than our estimate.
Revenue guidance unchanged on constant currency, a strong indicator
Infosys reduced FY2012E revenue guidance by 1% to 17-19% from 18-20% earlier. Confidence
of sustained growth reflects in the strong 3.2-5.4% qoq growth guidance for 3Q and the implied
3.3-5.6% growth in 4Q. Infosys could have very easily assumed a flat March quarter citing macro
uncertainty, that is has chosen not do so reflects the strength of demand environment for offshore
players. EPS guidance revision to Rs143-145 from Rs128-130 is primarily Rupee driven; guidance is
based on Re/US$ rate of 48.98 for 2H. We believe that the company has adequate buffers to
deliver EPS in this range even if Rupee was to appreciate a tad from these levels.
Getting execution engine back on track; BUY for a turnaround
Infosys’ performance has been impacted by a series of execution challenges including staffing, lack
of flexibility in strategic contracts and reorganization distractions (these concerns were construed
as business model challenges by the Street). However, several factors indicate that turnaround is
around the corner for Infosys including (1) strong deal pipeline and wins and (2) positive
management commentary, (3) improvement in utilization rates and reduction in attrition rates and
(4) strong recruitment. Foundation for turnaround was led by reorganization which has
accelerated decision making, tightening of sales execution, increased flexibility on deal structures
and aggressive deal participation. We revise FY2012/13E EPS to Rs141/162 from Rs134/160 earlier;
our estimates are based on a Re/US$ rate of 46.6/45.6. BUY; TP revised to Rs3,000/share.
What could have prompted strong back-ended revenue growth guidance?
Infosys’ strong 3.2% to 5.4% revenue growth guidance for 3QFY12 and implied 3.3% to
5.6% guidance for 4Q has surprised us and possibly the Street. Discretionary spending is at
the weakest, especially in the March quarter. In fact, Infosys has not grown volumes higher
than 5.5% even once in the past five years. This does beg a question on what could have
prompted such a strong 2H guidance when the company struggled to achieve upper end of
guidance in a seasonally strong 2QFY12 (and has missed or barely achieved upper end of the
guidance for the past three quarters). We believe that the following factors could have
prompted this
�� Strong contract wins which may ramp up in 3QFY12E and may spill over to 4QFY12E.
�� Element of seasonality may have been reduced due to weak growth in 1HFY12;
magnitude of wind down of discretionary projects would have a relatively lower impact
on revenue growth in 2HFY12E.
�� A new normal wherein guidance is realistic and performance within the range is
considered acceptable within the company.
�� Setting the bar high for the organization through an aggressive guidance after three
quarters of tepid, weaker-than-peers growth.
We model revenue growth of 18.5% for FY2012E.
Healthy pricing increase
Infosys’ offshore pricing increased 3.1% qoq, 3.5% in constant currency. Admittedly it is
difficult to take a view on pricing trends on just one quarter data; there could be various
factors that may lead to volatility in pricing. However, it is encouraging that pricing on a yoy
basis has also increased by a material 9%. We are also encouraged by revision in margin
decline guidance to 50-100 bps from 300 bps decline at the beginning of the year with part
of the revision led by operational efficiencies. We also note that the company has not pulled
in any levers to manage margins in 2QFY12. We believe that new strategic deals may
not be margin dilutive even if Infosys is relatively aggressive on contract terms or
pricing, if the execution engine is managed efficiently.
Broad-based growth after a long time
Infosys’ growth over the past few quarters has been impacted by some problem verticals.
Such problem verticals use up management bandwidth to fix the challenges. Broad-based
growth in 2QFY12 is encouraging in our view with even the perennial problem vertical of
telecom reporting healthy 2.5% qoq growth.
Key assumptions for FY2012E guidance
Infosys has maintained its earlier assumptions on volume and pricing in its revised FY2012E
guidance. The 90 bps reduction in US$ revenue growth guidance is purely on account of
revised cross-currency assumptions. The sharp 10%+ increase in FY2012E EPS guidance is
primarily driven by revised Re/US$ assumptions. This also reflects in the revised margin
decline guidance – now at 50-100 bps yoy versus 250 bps earlier.
Key revision to our estimates
We have revised our FY2012E/13E EPS estimates upwards to Rs141/162 from Rs134/160
earlier. Our estimates are based on a Re/US$ rate of 46.6 for FY2012E and an unchanged
Rs45.6 for FY2013E. We note that we build in Re/US$ assumption of Rs47.5 for 2HFY12E
versus Rs48.98 assumed by the company. We have broadly maintained our revenue growth
assumption for FY2012E and FY2013E – at 18.5% and 15%, respectively. Our margin
assumptions stand revised upwards by 70 bps and 30 bps for FY2012E and FY2013E –
31.3% and 30.9%, respectively.
Other details
Infosys maintained its gross hiring guidance of 45,000 for FY2012E. It hired a gross
15,352 employees in 2QFY12 taking the total in 1HFY12 to 25,274.
The company has made 23,000 campus offers till date for FY2013E.
Outstanding hedges at end-June 2011 stood at US$742 mn, flat qoq.
Attrition on a quarterly annualized basis came down to 20.6% from 21.5% in the
previous quarter – this is still outside the company’s comfort zone.
The company has combined all its platform-based solutions under one umbrella and
launched these under a new brand – Infosys EDGE.
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