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UBS Investment Research
First Read: Infosys Ltd
U nderlying growth slower than expected
Event: Infosys cuts dollar revenue forecast, shows no buffer in guidance
Infosys has revised FY12 dollar revenue growth guidance to 17-19% YoY vs. 18-
20% earlier. While this can be attributed to cross currency moves, we note that
there is no buffer in guidance, and leaves it vulnerable to future shocks. 2Q FY12
revenue at US$1746m was lower than our estimate of US$1765mn. Rupee revenue
at RS81bn and profits at Rs19bn were largely in line with our estimates. EBITDA
margins at 31% were higher than our estimate of 30.7%, largely due to forex rates.
Impact: rupee revenue, EPS raised due to USD/INR moves
FY12 rupee revenue guidance has been revised to Rs335.0 - 340.9bn, 21.8-24.0%
YoY growth vs. 15.5-17.5% earlier. FY12 EPS guidance is now Rs143.0 - 145.3,
19.7-21.6% YoY vs. Rs128.2 - 130.1, 7.3-8.9%YoY. The implied USD/INR rate
for the rest of the year is 48.98, the end of the quarter rate. We note that, Infosys
was conservative in this assumption when the currency depreciated in 2008-2009.
Action: remain cautious, view currency related gains as short lived
We remain concerned about the lack of volume uptick for Infosys – 2Q volume
growth was 4.4% vs. our estimate of 5.3%. Onsite volumes were up only 3.2%
QoQ vs 6.6% in 1Q FY12. Given that onsite volumes are indicative of project
starts, we are concerned that 2H could be weaker than expected.
Valuation: Neutral rated
Despite the sharp increase in rupee revenue and earnings guidance, we remain
concerned by lower volumes and lack of buffers in Infosys’ guidance. We rate
Infosys Neutral on demand concerns, which we expect will overshadow currency
moves. We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool, assuming a WACC
of 12.3% and a terminal growth rate of 3%.
Infosys Ltd
Infosys is the second largest IT services company in India with US$4.8bn
revenue and around 114,000 employees in FY10. Its services include application
development and maintenance, consulting services and package implementation,
business process management, infrastructure management, and testing services.
It provides these services to international clients through offshore development
facilities in India and other global centres. Infosys derives 66% of its revenue
from the US, 23% from Europe, and the rest from Asia Pacific.
Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
First Read: Infosys Ltd
U nderlying growth slower than expected
Event: Infosys cuts dollar revenue forecast, shows no buffer in guidance
Infosys has revised FY12 dollar revenue growth guidance to 17-19% YoY vs. 18-
20% earlier. While this can be attributed to cross currency moves, we note that
there is no buffer in guidance, and leaves it vulnerable to future shocks. 2Q FY12
revenue at US$1746m was lower than our estimate of US$1765mn. Rupee revenue
at RS81bn and profits at Rs19bn were largely in line with our estimates. EBITDA
margins at 31% were higher than our estimate of 30.7%, largely due to forex rates.
Impact: rupee revenue, EPS raised due to USD/INR moves
FY12 rupee revenue guidance has been revised to Rs335.0 - 340.9bn, 21.8-24.0%
YoY growth vs. 15.5-17.5% earlier. FY12 EPS guidance is now Rs143.0 - 145.3,
19.7-21.6% YoY vs. Rs128.2 - 130.1, 7.3-8.9%YoY. The implied USD/INR rate
for the rest of the year is 48.98, the end of the quarter rate. We note that, Infosys
was conservative in this assumption when the currency depreciated in 2008-2009.
Action: remain cautious, view currency related gains as short lived
We remain concerned about the lack of volume uptick for Infosys – 2Q volume
growth was 4.4% vs. our estimate of 5.3%. Onsite volumes were up only 3.2%
QoQ vs 6.6% in 1Q FY12. Given that onsite volumes are indicative of project
starts, we are concerned that 2H could be weaker than expected.
Valuation: Neutral rated
Despite the sharp increase in rupee revenue and earnings guidance, we remain
concerned by lower volumes and lack of buffers in Infosys’ guidance. We rate
Infosys Neutral on demand concerns, which we expect will overshadow currency
moves. We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool, assuming a WACC
of 12.3% and a terminal growth rate of 3%.
Infosys Ltd
Infosys is the second largest IT services company in India with US$4.8bn
revenue and around 114,000 employees in FY10. Its services include application
development and maintenance, consulting services and package implementation,
business process management, infrastructure management, and testing services.
It provides these services to international clients through offshore development
facilities in India and other global centres. Infosys derives 66% of its revenue
from the US, 23% from Europe, and the rest from Asia Pacific.
Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.
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