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INFOSYS
Expect FY12 guidance to be lowered on macro risks. Sell maintained
Update We believe Infosys will probably lower its FY12 guidance when it reports Q2 2012
earnings (to end-September) on 12 October. For Q2, we expect revenue of $1,720m and
EPS at $0.66 vs the consensus of $1,637m and $0.67 respectively. Our negative stance
stems from several factors: 1/ increased pressure in the financial services sector (35% of
group revenue) due to growing macroeconomic uncertainty over the past three months,
affecting several investment banks in the short-term (such as UBS, Bank of America,
Goldman Sachs) which are planning important restructuring measures. Our industry contacts
mentioned lower volume growth as well as a slight decline in pricing in constant currency.
We expect this situation to last about six months before any stabilisation; 2/ tough comps in
Europe (21% of group revenue) with Q2 2011 up 22% yoy. We note that Infosys also
reported a 3% decline sequentially at constant currency in the past quarter; 3/ probable
pricing pressure going forward as most indicators point to a worsening environment ahead,
negatively impacting IT demand (no budget flush likely in Q4 11 and reduced growth
prospects for 2012); and 4/ ongoing reorganisation. Upside risks include: 1/ intact
structural demand if clients continue the offshore trend and favour tier-1 Indian vendors like
Infosys and 2/ depreciation of the Indian rupee vs the US dollar would help EPS as 1%
depreciation has a positive 40bp impact on operating margin.
Impact For FY12 (to end-March), we expect revenue of $6.8bn (+13% yoy vs guidance
for +18-20% yoy to $7.13-7.25bn and the consensus of $6.61bn) and EPS unchanged at
$2.77 (vs guidance of $2.88-2.92 and the consensus at $2.77).
Target price & rating Although the share price is down 34% YTD, we believe that there are still
important downside risks. Consequently, we maintain our Sell rating with a TP of $43 based on
a mix of multiples (12m forward EV/Sales, EV/EBIT) and DCF, specifically 2.6x 12m forward
EV/Sales (historical trough), 8x 12m forward EV/EBIT and DCF (WACC 10.3%, long-term
margin 26%, terminal growth 2.5%). Risks: currency swings (INR vs USD, EUR and GBP),
ongoing reorganisation, potential acquisitions.
Next events & catalysts Infosys has scheduled a conference call for Q2 2012 (to endSeptember) on 12 October at 10:30am CET (2:00 pm IST). Dial-in: UK +44 0808 101 1573
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFOSYS
Expect FY12 guidance to be lowered on macro risks. Sell maintained
Update We believe Infosys will probably lower its FY12 guidance when it reports Q2 2012
earnings (to end-September) on 12 October. For Q2, we expect revenue of $1,720m and
EPS at $0.66 vs the consensus of $1,637m and $0.67 respectively. Our negative stance
stems from several factors: 1/ increased pressure in the financial services sector (35% of
group revenue) due to growing macroeconomic uncertainty over the past three months,
affecting several investment banks in the short-term (such as UBS, Bank of America,
Goldman Sachs) which are planning important restructuring measures. Our industry contacts
mentioned lower volume growth as well as a slight decline in pricing in constant currency.
We expect this situation to last about six months before any stabilisation; 2/ tough comps in
Europe (21% of group revenue) with Q2 2011 up 22% yoy. We note that Infosys also
reported a 3% decline sequentially at constant currency in the past quarter; 3/ probable
pricing pressure going forward as most indicators point to a worsening environment ahead,
negatively impacting IT demand (no budget flush likely in Q4 11 and reduced growth
prospects for 2012); and 4/ ongoing reorganisation. Upside risks include: 1/ intact
structural demand if clients continue the offshore trend and favour tier-1 Indian vendors like
Infosys and 2/ depreciation of the Indian rupee vs the US dollar would help EPS as 1%
depreciation has a positive 40bp impact on operating margin.
Impact For FY12 (to end-March), we expect revenue of $6.8bn (+13% yoy vs guidance
for +18-20% yoy to $7.13-7.25bn and the consensus of $6.61bn) and EPS unchanged at
$2.77 (vs guidance of $2.88-2.92 and the consensus at $2.77).
Target price & rating Although the share price is down 34% YTD, we believe that there are still
important downside risks. Consequently, we maintain our Sell rating with a TP of $43 based on
a mix of multiples (12m forward EV/Sales, EV/EBIT) and DCF, specifically 2.6x 12m forward
EV/Sales (historical trough), 8x 12m forward EV/EBIT and DCF (WACC 10.3%, long-term
margin 26%, terminal growth 2.5%). Risks: currency swings (INR vs USD, EUR and GBP),
ongoing reorganisation, potential acquisitions.
Next events & catalysts Infosys has scheduled a conference call for Q2 2012 (to endSeptember) on 12 October at 10:30am CET (2:00 pm IST). Dial-in: UK +44 0808 101 1573
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