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Infosys revenue outlook—upper end is aggressive
A quick recap of guidance: Infosys guided for 17-19% US$ revenue growth for FY2012E. Revenue
growth guidance is 3.2-5.4% for 3QFY12 and the implied guidance range is 3.3-5.6% for 4QFY12.
This surprised us, as it did the rest of the Street, given the seasonally weak 2H for IT business,
Infosys’ own execution challenges and deteriorating macro outlook. As a result, we and Street
modeled revenue growth below the upper end of Infosys’ guidance, a deviation from the past
trend.
Infosys reiterated its 3QFY12 and FY2012E guidance range after Dow Jones reports suggested that
the company may miss the upper end of the revenue outlook. However, the company did indicate
that decision making has slowed down further from the date of issuance of the last outlook. We
believe there could be further fine-tuning at the upper end; there could be a minor miss as well
but this is manageable as long as Rupee remains at the current levels.
What could have prompted aggressive guidance in the first place?
Macro headwinds were sufficient for Infosys to take a conservative view of it outlook. We can
think of the following factors that could have prompted the aggressive guidance (1) strong
contract wins which may ramp up in 3QFY12 and may spill over to 4QFY12; (2) A weak 1H,
setting a low base to work on for 2H growth; (3) A new normal where ‘within-range guidance
delivery’ is acceptable and (4) Guidance as a tool for setting a high bar internally. Please refer to
our noted dated 13th October titled “More thoughts on Infosys’ FY2012E guidance”
Some deterioration built in our estimates though not a freeze in decision making
We do not rule out further deterioration in the demand environment but this is already in the
numbers; our FY2013E revenue growth of 15% is already building in some amount of caution.
However, our estimates do not capture the possibility of a freeze in decision making, the
probability of which has increased from continued policy paralysis in the Eurozone. At the EPS level,
a miss on revenue growth can be mitigated if Re/US$ rate sustains above our assumption of 49.75
APNT’s share gains in terms of market cap. has been much ahead of sales and EBITDA share gains
During FY2006-11, APNT’s value market shares (among top-4 players) have increased to 53%
from 44% and it has gained volume market shares to 52% from 49% (it has likely witnessed
higher-than-industry uptrading, in our view). Its average annual volume growth during the period
was ~16%. In our view, the share gains were mainly due to benign competitive activity. However,
competition is getting increasingly active and maintaining such share gains and corresponding
volume growth appears difficult for the company, in our view. We model volume growth of 13%
and 12% over FY2012E and FY2013E, respectively. Furthermore, with emulsions now accounting
for ~45% of its sales, maintaining the current growth trend in uptrading appears challenging.
We also highlight that during FY2006-11, APNT’s share in EBITDA (among top-4 players) has
increased to 64% from 51% and share in market capitalization has increased to 70% from 56%.
Exhibit 1 shows share of top-4 paint companies in terms of sales value, volume, EBITDA
and market capitalization.
Paint industry is going through a dynamic period
Increasing brand relevance. With increasing competitive activity, brand equity is becoming
increasingly important. Consumer involvement in decision making is increasing—ratio of
consumers and painters in decision making is 50:50 now (estimated at 30:70 ten years ago).
Celebrity endorsement. As the frequency of painting is significantly lower than the
consumption of FMCG products, ~90% of the advertisements by paint companies do not
necessarily lead to purchase. However, as brand recall becomes important, paint companies are
resorting to celebrity advertisement (a relatively new trend) to capture consumer mindshare.
Basket of innovative products. To catch consumer attention companies are launching
innovative products, Akzo Nobel’s Dulux Weathershield which claims to reduce home
temperature by 5 degrees, Kansai Nerolac’s ’Ecoclean‘ which claims to have has low odor
and low volatile organic compounds (VOC) and Berger’s ’Easy clean‘ which can be
cleaned easily and hence help remove stains on the wall.
Increasing channel investments. With higher competitive activity, paint companies’
endeavor is to create demand at the painter level instead of just relying on the dealer
channel. New initiatives include (1) organizing workshops for painters, (2) reward point
system at painter level, (3) educating painters on benefits of the brand.
Consumer mindset is changing for good. Painting is gradually shifting from being a
discretionary spend to a necessity. This is being triggered by, (1) increase in home
ownership, (2) increase in disposable income and (3) penetration-led opportunity—of the
210 mn households in India, industry experts estimate that <20 mn engage in
painting/repainting activity.
What is the competition doing?
Akzo Nobel has market share of ~10% and is targeting share gain of 1-2% every year. It
is primarily present in metros, reaches 6,000 outlets (50% of its dealers are in metros) and
is targeting 9,000 outlets over the next few years. It has also set up Dulux Decorative
Centers which are exclusive shops for Akzo Nobel products. Adspends are likely to remain
elevated at ~9% of sales (4% in FY2006).
Berger has launched two new exterior and interior emulsions and has stepped up its
dealer service quality, as per industry sources. It aims to match industry in terms of
volume growth and outperform in terms of mix improvement (Berger is primarily a midand
mass-end player).
Kansai Nerolac has stepped up focus on the decorative segment and has increased its
adspends by ~100 bps over the last couple of years. It is aggressively marketing its brand
‘Impressions Eco Clean’ on the ‘healthy’ paint platform. This is akin to the ‘vegetarian
toothpaste’ campaign by Anchor in the early-2000s whereby highlighting a basic product
fact itself became a differentiator.
In addition to the above, new entrants – Nippon, Sherwin Williams and Jotun are also
increasing their dealer network and expanding geographical presence.
Look for better entry points; retain SELL
We retain SELL on Asian Paints with a target price of Rs2,900. The stock is trading close to
its highest-ever relative P/E versus BSE-30 index since 1993. Our worries about APNT’s are
intact, (1) uncertainty in international operations, particularly Middle East and Egypt
operations, (2) scope to take further price hikes is limited and (3) likely moderation in
decoratives paint demand, auto and industry may not provide buffer. We remain bullish on
the medium-term (2-3 years) prospects of the paint industry. However, we believe expensive
valuations and near-term earnings risk could provide better entry points. Key upside risks
include higher-than-expected demand conditions and significant correction in input costs
providing opportunity for APNT to improve margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys revenue outlook—upper end is aggressive
A quick recap of guidance: Infosys guided for 17-19% US$ revenue growth for FY2012E. Revenue
growth guidance is 3.2-5.4% for 3QFY12 and the implied guidance range is 3.3-5.6% for 4QFY12.
This surprised us, as it did the rest of the Street, given the seasonally weak 2H for IT business,
Infosys’ own execution challenges and deteriorating macro outlook. As a result, we and Street
modeled revenue growth below the upper end of Infosys’ guidance, a deviation from the past
trend.
Infosys reiterated its 3QFY12 and FY2012E guidance range after Dow Jones reports suggested that
the company may miss the upper end of the revenue outlook. However, the company did indicate
that decision making has slowed down further from the date of issuance of the last outlook. We
believe there could be further fine-tuning at the upper end; there could be a minor miss as well
but this is manageable as long as Rupee remains at the current levels.
What could have prompted aggressive guidance in the first place?
Macro headwinds were sufficient for Infosys to take a conservative view of it outlook. We can
think of the following factors that could have prompted the aggressive guidance (1) strong
contract wins which may ramp up in 3QFY12 and may spill over to 4QFY12; (2) A weak 1H,
setting a low base to work on for 2H growth; (3) A new normal where ‘within-range guidance
delivery’ is acceptable and (4) Guidance as a tool for setting a high bar internally. Please refer to
our noted dated 13th October titled “More thoughts on Infosys’ FY2012E guidance”
Some deterioration built in our estimates though not a freeze in decision making
We do not rule out further deterioration in the demand environment but this is already in the
numbers; our FY2013E revenue growth of 15% is already building in some amount of caution.
However, our estimates do not capture the possibility of a freeze in decision making, the
probability of which has increased from continued policy paralysis in the Eurozone. At the EPS level,
a miss on revenue growth can be mitigated if Re/US$ rate sustains above our assumption of 49.75
APNT’s share gains in terms of market cap. has been much ahead of sales and EBITDA share gains
During FY2006-11, APNT’s value market shares (among top-4 players) have increased to 53%
from 44% and it has gained volume market shares to 52% from 49% (it has likely witnessed
higher-than-industry uptrading, in our view). Its average annual volume growth during the period
was ~16%. In our view, the share gains were mainly due to benign competitive activity. However,
competition is getting increasingly active and maintaining such share gains and corresponding
volume growth appears difficult for the company, in our view. We model volume growth of 13%
and 12% over FY2012E and FY2013E, respectively. Furthermore, with emulsions now accounting
for ~45% of its sales, maintaining the current growth trend in uptrading appears challenging.
We also highlight that during FY2006-11, APNT’s share in EBITDA (among top-4 players) has
increased to 64% from 51% and share in market capitalization has increased to 70% from 56%.
Exhibit 1 shows share of top-4 paint companies in terms of sales value, volume, EBITDA
and market capitalization.
Paint industry is going through a dynamic period
Increasing brand relevance. With increasing competitive activity, brand equity is becoming
increasingly important. Consumer involvement in decision making is increasing—ratio of
consumers and painters in decision making is 50:50 now (estimated at 30:70 ten years ago).
Celebrity endorsement. As the frequency of painting is significantly lower than the
consumption of FMCG products, ~90% of the advertisements by paint companies do not
necessarily lead to purchase. However, as brand recall becomes important, paint companies are
resorting to celebrity advertisement (a relatively new trend) to capture consumer mindshare.
Basket of innovative products. To catch consumer attention companies are launching
innovative products, Akzo Nobel’s Dulux Weathershield which claims to reduce home
temperature by 5 degrees, Kansai Nerolac’s ’Ecoclean‘ which claims to have has low odor
and low volatile organic compounds (VOC) and Berger’s ’Easy clean‘ which can be
cleaned easily and hence help remove stains on the wall.
Increasing channel investments. With higher competitive activity, paint companies’
endeavor is to create demand at the painter level instead of just relying on the dealer
channel. New initiatives include (1) organizing workshops for painters, (2) reward point
system at painter level, (3) educating painters on benefits of the brand.
Consumer mindset is changing for good. Painting is gradually shifting from being a
discretionary spend to a necessity. This is being triggered by, (1) increase in home
ownership, (2) increase in disposable income and (3) penetration-led opportunity—of the
210 mn households in India, industry experts estimate that <20 mn engage in
painting/repainting activity.
What is the competition doing?
Akzo Nobel has market share of ~10% and is targeting share gain of 1-2% every year. It
is primarily present in metros, reaches 6,000 outlets (50% of its dealers are in metros) and
is targeting 9,000 outlets over the next few years. It has also set up Dulux Decorative
Centers which are exclusive shops for Akzo Nobel products. Adspends are likely to remain
elevated at ~9% of sales (4% in FY2006).
Berger has launched two new exterior and interior emulsions and has stepped up its
dealer service quality, as per industry sources. It aims to match industry in terms of
volume growth and outperform in terms of mix improvement (Berger is primarily a midand
mass-end player).
Kansai Nerolac has stepped up focus on the decorative segment and has increased its
adspends by ~100 bps over the last couple of years. It is aggressively marketing its brand
‘Impressions Eco Clean’ on the ‘healthy’ paint platform. This is akin to the ‘vegetarian
toothpaste’ campaign by Anchor in the early-2000s whereby highlighting a basic product
fact itself became a differentiator.
In addition to the above, new entrants – Nippon, Sherwin Williams and Jotun are also
increasing their dealer network and expanding geographical presence.
Look for better entry points; retain SELL
We retain SELL on Asian Paints with a target price of Rs2,900. The stock is trading close to
its highest-ever relative P/E versus BSE-30 index since 1993. Our worries about APNT’s are
intact, (1) uncertainty in international operations, particularly Middle East and Egypt
operations, (2) scope to take further price hikes is limited and (3) likely moderation in
decoratives paint demand, auto and industry may not provide buffer. We remain bullish on
the medium-term (2-3 years) prospects of the paint industry. However, we believe expensive
valuations and near-term earnings risk could provide better entry points. Key upside risks
include higher-than-expected demand conditions and significant correction in input costs
providing opportunity for APNT to improve margins.
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