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Near-term taxing time…
Infosys reported its Q3FY12 earning ahead of our estimates. Sequentially,
US dollar revenues grew 3.4% (3.3% estimate) led by volume growth of
3.1% (3.1% estimate). Rupee revenues grew 14.8% QoQ (13.4% estimate)
helped primarily by the depreciating rupee. The management indicated that
CY12E IT budgets could be flat or marginally negative, ramp-ups across
verticals are getting delayed, discretionary spends are almost frozen and
project starts have got deferred (in line with our preview discussions). Flat
Q4FY12 and lowering of FY12E US$ revenue guidance likely reflects the
underlying business sentiment. Though we maintain our BUY rating, we
reiterate that near term earnings volatility, led by macroeconomic
uncertainties, may create supply overhang at higher levels. However, sharp
sell offs could be used as attractive re-entry points as valuations, based on
FY13E estimates, turn cheap.
Earning Summary
Infosys reported Q3FY12 revenues of | 9,298 crore (30.8% YoY and
14.8% QoQ growth) ahead of our | 9,183 crore estimate. Operating
margins (EBIT) of | 2,899 crore were also ahead of our | 2,786 crore
estimate on 31.2% operating margin vs. our 30.3% estimate. EBIT
margins increased ~300 bps QoQ led by rupee depreciation but offset
by reinvestments in the business. Infosys earned | 41.5 in diluted EPS
ahead of our | 39.6 estimate aided by higher income of | 422 crore vs.
our | 375 crore estimate.
Raising FY13E estimates on favourable rupee assumption
We are raising our FY13E revenue estimate to | 37,763 crore vs. |
36,405 crore earlier while consensus is at | 39,636 crore. Similarly, we
are raising FY13E EPS to | 156 vs. | 147.9 earlier with consensus at |
166.2. Our estimates now assume average $/| rate of | 47.6 for FY13E
vs. | 45.3 earlier.
Valuation
We are raising our FY12E/FY13E revenue/EPS estimates and expect
revenue/EPS to grow at 18.4%/12.5% CAGR, respectively, during FY10-
FY13E. We have valued Infosys at 19x {in-line with its historical (since April
2007) one-year forward PE average of 19x) our FY13E EPS estimate of | 156
and maintained our BUY rating with a price target of | 2950.
Operating metric highlight – top client weakness a concern
Sequentially, volumes grew 3.1%, in line with our 3.1% estimate.
Reported offshore per capita productivity was down 0.6% QoQ while
onsite increased 1.4% leading to a blended impact of 0.1%. Client
additions were robust at 49 with two >$500 million transformational
deals. Notably, top client contribution declined 8% sequentially and
grew a modest 1.6% YoY. Utilisation excluding trainees was flat
sequentially at 77.4%. The company added 9,655 gross heads (3,266
net) and has made 20,000 campus offers (lower than 23,000
suggested in Q2 earnings) for FY13E. LTM attrition declined to 15.4%
vs. 15.6% in Q2.
Vertical & service line trends
FSI grew 3.1% QoQ in reported currency (RC) and 4.0% in constant
currency (CC) vs. 6.2% and 6.3%, respectively, in Q2. Manufacturing
grew 4.8% QoQ in RC and 5.7% in CC. Retail & life sciences grew
5.3% in CC. Energy utilities & communication services growth was
tepid at 1.4% in RC. Application development grew 3.4% QoQ while
application maintenance grew 4.4% QoQ. Consulting & package
implementation grew 1.4% QoQ vs. 2.8% QoQ in Q2. From a
geographic perspective, North America grew 0.9% and 1.1% QoQ in
RC and CC terms, respectively. Europe grew 13.7% and 16.8% in RC &
CC, respectively, led by growth in new clients. Rest of the world (RoW)
RC/CC growth moderated to 0.4%/2.5% vs. 5.8%/7.3% respectively in
Q2.
Valuation
We are raising our FY12E/FY13E revenue/EPS estimates and expect
revenue/EPS to grow at 18.4%/12.5% CAGR, respectively, during FY10-
FY13E. We have valued Infosys at 19x {in line with its historical (since April
2007) one-year forward PE average of 19x) our FY13E EPS estimate of | 156
and maintained our BUY rating with a 12 month price target of | 2950.
Risk & concerns
Macro remains uncertain and could alter the IT spending pattern in CY12.
Further, though the rupee created tailwinds in Q3FY12, cross-currency
volatility remains a key concern. A significant appreciation of the rupee
from these levels could lead to estimate revisions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Near-term taxing time…
Infosys reported its Q3FY12 earning ahead of our estimates. Sequentially,
US dollar revenues grew 3.4% (3.3% estimate) led by volume growth of
3.1% (3.1% estimate). Rupee revenues grew 14.8% QoQ (13.4% estimate)
helped primarily by the depreciating rupee. The management indicated that
CY12E IT budgets could be flat or marginally negative, ramp-ups across
verticals are getting delayed, discretionary spends are almost frozen and
project starts have got deferred (in line with our preview discussions). Flat
Q4FY12 and lowering of FY12E US$ revenue guidance likely reflects the
underlying business sentiment. Though we maintain our BUY rating, we
reiterate that near term earnings volatility, led by macroeconomic
uncertainties, may create supply overhang at higher levels. However, sharp
sell offs could be used as attractive re-entry points as valuations, based on
FY13E estimates, turn cheap.
Earning Summary
Infosys reported Q3FY12 revenues of | 9,298 crore (30.8% YoY and
14.8% QoQ growth) ahead of our | 9,183 crore estimate. Operating
margins (EBIT) of | 2,899 crore were also ahead of our | 2,786 crore
estimate on 31.2% operating margin vs. our 30.3% estimate. EBIT
margins increased ~300 bps QoQ led by rupee depreciation but offset
by reinvestments in the business. Infosys earned | 41.5 in diluted EPS
ahead of our | 39.6 estimate aided by higher income of | 422 crore vs.
our | 375 crore estimate.
Raising FY13E estimates on favourable rupee assumption
We are raising our FY13E revenue estimate to | 37,763 crore vs. |
36,405 crore earlier while consensus is at | 39,636 crore. Similarly, we
are raising FY13E EPS to | 156 vs. | 147.9 earlier with consensus at |
166.2. Our estimates now assume average $/| rate of | 47.6 for FY13E
vs. | 45.3 earlier.
Valuation
We are raising our FY12E/FY13E revenue/EPS estimates and expect
revenue/EPS to grow at 18.4%/12.5% CAGR, respectively, during FY10-
FY13E. We have valued Infosys at 19x {in-line with its historical (since April
2007) one-year forward PE average of 19x) our FY13E EPS estimate of | 156
and maintained our BUY rating with a price target of | 2950.
Operating metric highlight – top client weakness a concern
Sequentially, volumes grew 3.1%, in line with our 3.1% estimate.
Reported offshore per capita productivity was down 0.6% QoQ while
onsite increased 1.4% leading to a blended impact of 0.1%. Client
additions were robust at 49 with two >$500 million transformational
deals. Notably, top client contribution declined 8% sequentially and
grew a modest 1.6% YoY. Utilisation excluding trainees was flat
sequentially at 77.4%. The company added 9,655 gross heads (3,266
net) and has made 20,000 campus offers (lower than 23,000
suggested in Q2 earnings) for FY13E. LTM attrition declined to 15.4%
vs. 15.6% in Q2.
Vertical & service line trends
FSI grew 3.1% QoQ in reported currency (RC) and 4.0% in constant
currency (CC) vs. 6.2% and 6.3%, respectively, in Q2. Manufacturing
grew 4.8% QoQ in RC and 5.7% in CC. Retail & life sciences grew
5.3% in CC. Energy utilities & communication services growth was
tepid at 1.4% in RC. Application development grew 3.4% QoQ while
application maintenance grew 4.4% QoQ. Consulting & package
implementation grew 1.4% QoQ vs. 2.8% QoQ in Q2. From a
geographic perspective, North America grew 0.9% and 1.1% QoQ in
RC and CC terms, respectively. Europe grew 13.7% and 16.8% in RC &
CC, respectively, led by growth in new clients. Rest of the world (RoW)
RC/CC growth moderated to 0.4%/2.5% vs. 5.8%/7.3% respectively in
Q2.
Valuation
We are raising our FY12E/FY13E revenue/EPS estimates and expect
revenue/EPS to grow at 18.4%/12.5% CAGR, respectively, during FY10-
FY13E. We have valued Infosys at 19x {in line with its historical (since April
2007) one-year forward PE average of 19x) our FY13E EPS estimate of | 156
and maintained our BUY rating with a 12 month price target of | 2950.
Risk & concerns
Macro remains uncertain and could alter the IT spending pattern in CY12.
Further, though the rupee created tailwinds in Q3FY12, cross-currency
volatility remains a key concern. A significant appreciation of the rupee
from these levels could lead to estimate revisions.
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