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INFOSYS TECHNOLOGIES LTD
PRICE: RS.2590 RECOMMENDATION: BUY
TARGET PRICE: RS.3034 FY13E P/E: 15.4X
Operating performance better than expected; USD guidance reflects
uncertainty in short term
q 3QFY12 numbers came in above expectations, largely on the back of better-
than-expected margin performance. While volume growth of about
3% was in line, improvement in average realisations was a positive surprise.
q The company has guided for an almost flat growth in 4Q. Consequently,
the USD revenue growth guidance for FY12 has been moderated to
16.4% v/s 17.1% - 19.1% earlier. The moderation does reflect the relatively
high uncertainty on client spending in the short term. Infosys has
been consistently voicing concerns on delays in decision making.
q However, it has also maintained that, there have been no project cancellations,
as yet. Also, early indications for CY12 suggest that, client budgets
are likely to be flat or marginally lower YoY. Within this, the offshore
content is expected to increase. Europe has seen improved traction
for Infosys in 3Q with revenues growing by 16.8% in CC terms. Spending
(and Off-shoring) in Europe can increase, in case there are no defaults /
bankruptcies. These factors bode well for the demand growth scenario in
FY13.
q Addition of 49 clients in 3Q (45 in 2Q) is a positive, we believe. The company
also won 5 large deals including 2 deals of >$500mn each. Infosys
has maintained its target of adding 45,000 employees on a gross basis.
Revenues from products, platforms and solutions have grown by 30%
QoQ, reflecting improved traction in non-linear revenues.
q We make changes to our FY12 estimates and FY13 estimates. We have assumed
the rupee at R52 / USD in 4Q and to average 50 / USD in FY13.
Consequently, we expect the EPS to be Rs.147 (Rs.142 earlier) in FY12 and
Rs.169 (Rs.155 earlier) in FY13, largely due to currency impact.
q In view of the uncertain macro scene, we are according a discount to the
average valuations prevalent during the past five years. Consequently,
our target price stands revised to Rs.3034 (Rs.2995 earlier).
q While the stock is expected to remain range-bound in the short term, we
remain positive on the medium - to - long term strategy of the company.
Management has reiterated its long term commitment to increase the
proportion of non-linear revenues. Infosys should benefit from the positive
change in client sentiments and the presence of various margin levers.
Maintain BUY.
q Recessionary conditions in the developed economies and a sharp appreciation
in the rupee beyond our estimates are the key risks to our revised
earnings estimates and recommendation.
Revenue growth at lower end of the guided band
n Revenues for the quarter came in at the lower end of the guided band. Growth
in CC terms was 4.4% QoQ.
n Volumes grew by 3% on a sequential basis, which was similar to our expectations.
While cross currency movements impacted USD revenue growth, average
realization increases compensated for the same.
n Average realisations improved by about 80bps on a weighted average basis. The
improvement in realisations was a pleasant surprise.
n Revenue growth came largely from Europe, which surprisingly reported a CC
growth of 16.8%. The high growth in Europe was a result of the investments
which Infosys has made. The company has opened offices in France and Germany
apart from adding senior resources.
n However, we believe that, 3Q growth rates may be difficult to replicate.
QoQ Growth in geographies (Constant Currency terms)
(Rs mn) 3QFY12 2QFY12
North America 1.1 6.3
Europe 16.8 2.1
ROW 2.5 7.3
Source : Company
n In terms of verticals, the growth was more secular with all verticals reporting a
growth of 3% - 6% QoQ.
n Infosys has been investing heavily in verticals like Life Sciences and Healthcare
(investment verticals), which reported high growth during the quarter. Energy
and Utilities also reported a decent growth QoQ.
n All these verticals continued to witness scale up in existing accounts and also
added significant new clients during the quarter
Large deals continue
n Infosys continued to win new large deals and had a total of 5 new deals in 3Q (4
in 2Q). Two of these deals were of more than $500mn each.
n In addition to these the company won one transformational deal (2 in 2Q).
n With discretionary spends witnessing moderation, the transformational deals flow
is expected to slow down.
New deals won based on platforms - TCV of $300mn
n Infosys has been focusing on products, platforms and solutions (PPS) with a view
to provide better value to customers and convert their capex to opex.
n The focus on PPS is also expected to ease the pressure on margins for Infosys in
the medium to long term.
Revenue growth- Services wise
(Rs mn) 3QFY12 2QFY12 QoQ (%) 3QFY11 YoY (%)
Business operations 59,786 52,077 14.8 44,484 34.4
As a % of revenues 64.3 64.3 62.6
Consul & SI 28,452 25,269 12.6 22,384 27.1
As a % of revenues 30.6 31.2 31.5
Products, PF, Solns 4,742 3,645 30.1 3,979 19.2
As a % of revenues 5.1 4.5 5.6
Total revenues 92,980 80,990 14.8 70,848 31.2
Source : Company
n During 2Q, Infosys had launched Infosys Edge, a suite of 9 platforms, some of
which were re-launched.
n Infosys is also seeing increased traction in Finacle, which won 10 deals in 3Q.
The cloud practice is also getting new clients with 15 deals during the quarter.
n The company already has contracts totaling to $300mn (total contract value -
TCV), which are based on these platforms and which are to be executed over
the next 3 - 5 years.
n We see this segment as a critical piece of Infosys' strategy to sustain margins as
well as revenue growth in the future.
Average realisations higher - encouraging
n Average blended realisations on a CC basis were higher by 0.80%. This comes
on top of the 1% improvement seen in 2Q.
n The management indicated mix change as the main reason for the improvement
in off-shore realisations. Apart from mix change, billing rate increases in some
accounts also brought about the QoQ growth.
n We see this like-to-like increase as an encouraging sign amid challenging macro
scene.
n We also note that, revenues from PPS grew by 30% QoQ and would also have
contributed marginally to this.
Margins improved - currency at play
n Infosys reported a 300bps improvement in EBIT margins, which was above expectations.
n This was largely due to the rupee depreciation, which added 440bps to the margins.
n A part of this improvement was compensated by higher expenditure towards
employees and sub-contractors.
n We had expected higher re-investment of the currency gains in business generating
initiatives.
n The company added 3,266 employees on a net basis and maintained utilization
rates at about 77.4%.
n The management has indicated that, it will be comfortable with utilization rates
of between 76% - 80%. It has earlier indicated a range of 78% - 82%.
Other income component in line with estimates
n The other income component came almost in line with our estimates.
n The company suffered a loss of about Rs.200mn due to currency fluctuations.
n Infosys has hedges worth $877mn as at 3Q end as against $742mn at the end of
the previous quarter.
INR-based guidance revised upwards and USD based guidance
downwards
n Infosys has increased the INR-based guidance significantly. This is solely due to
the currency fluctuations, we understand.
n The revenue guidance in USD terms for 4Q is almost similar to the 3Q revenues,
indicating flat growth.
n We find this disappointing and see this as a reflection of the near term uncertainties.
n We understand that, the company has experienced further delays in decision
making and in project scale-ups during 3Q. The management has been sounding
caution as far as the macro scene is concerned.
n This has resulted in the company achieving only the lower end of the guided
revenues in 3Q and has made the management more cautious. To that extent,
some extra caution is built in the 4Q guidance, we opine.
n Consequently, USD revenue growth guidance for FY12 has been reduced from
17.1% - 19.1% to 16.4% for FY12. A part of this reduction (0.5% / 0.6%) may
be due to the cross-currency movements, we believe.
Some positives give hope for FY13
n The client budgets for CY12 are expected to be finalized on time (mid-February)
and they are expected to be flat or marginally lower YoY. The offshoring component
in the same is expected to increase.
n While the company has witnessed delays, there have been no project cancellations,
according to the management.
n The clients are willing to take short term decisions, even as long term calls are
being avoided.
n The sharp rise in European revenues in 3Q (while not being a secular trend) does
indicate that, the off-shoring initiatives may increase in case there are no defaults
/ bankruptcies.
n The company has added 49 customers in 3Q, taking the total to 120 for the fiscal.
Also, it is winning large deals (5 in 3Q). These deals will likely scale up in
the next few quarters.
n With Infosys focusing on non-linear initiatives, the segment has achieved a 30%
QoQ growth in INR revenues in 3Q, albeit on a small base.
n We see this as an important lever for growth as well as margin sustenance in the
future quarters. Infosys has won several clients in these areas in FY13.
n Thus, while there may be challenges in the short term as reflected in the 4Q
guidance, these factors may lead to better growth rates in future quarters.
Financial estimates
n We have made changes to our FY12 and FY13 estimates.
n We have kept most assumptions unchanged. However, we have assumed the
rupee to average 52 / USD in 4QFY12 and 50 / USD in FY13.
n For FY13, we have assumed volume growth to be 14%. We expect margins to
be impacted by the rupee and salary increments. Better utilization levels may restrict
the impact to about 50bps, we estimate.
n With tax rates expected to be at about 28% of PBT, PAT is expected to grow by
about 14%. EPS is expected to be at about Rs.169. The assumption of the rupee
has impacted our FY13 estimates positively.
Valuations and recommendations
n In view of the uncertain macro scene, we are according a discount to the average
valuations prevalent during the past five years.
n Consequently, our target price stands revised to Rs.3034 based on FY13E earnings
(Rs.2995 earlier).
n At our target price, our FY13 earnings will be discounted by 18x.
n We note that, significant currency fluctuations may have an impact on our expectations
and hence, also the price target.
n We remain positive on the medium - to - long term strategy of the company.
Management has reiterated its long term commitment to increase the proportion
of non-linear revenues.
n We concur with the management's view that this is necessary to ensure profitable
growth, while providing more value to customers. Post the recent reorganization,
there is greater emphasis on products, platforms and solutions. We remain
optimistic on the company's future prospects, led by a strong management
team and Maintain BUY.
n However, in the short term, the stock may remain range-bound due to disappointment
over the 4Q guidance and due to the uncertain macro.
Concerns and risks
n A sharp appreciation in the rupee against various currencies will impact our earnings
estimates.
n Recessionary conditions in developed economies will likely impact future revenue
growth and profitability of the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INFOSYS TECHNOLOGIES LTD
PRICE: RS.2590 RECOMMENDATION: BUY
TARGET PRICE: RS.3034 FY13E P/E: 15.4X
Operating performance better than expected; USD guidance reflects
uncertainty in short term
q 3QFY12 numbers came in above expectations, largely on the back of better-
than-expected margin performance. While volume growth of about
3% was in line, improvement in average realisations was a positive surprise.
q The company has guided for an almost flat growth in 4Q. Consequently,
the USD revenue growth guidance for FY12 has been moderated to
16.4% v/s 17.1% - 19.1% earlier. The moderation does reflect the relatively
high uncertainty on client spending in the short term. Infosys has
been consistently voicing concerns on delays in decision making.
q However, it has also maintained that, there have been no project cancellations,
as yet. Also, early indications for CY12 suggest that, client budgets
are likely to be flat or marginally lower YoY. Within this, the offshore
content is expected to increase. Europe has seen improved traction
for Infosys in 3Q with revenues growing by 16.8% in CC terms. Spending
(and Off-shoring) in Europe can increase, in case there are no defaults /
bankruptcies. These factors bode well for the demand growth scenario in
FY13.
q Addition of 49 clients in 3Q (45 in 2Q) is a positive, we believe. The company
also won 5 large deals including 2 deals of >$500mn each. Infosys
has maintained its target of adding 45,000 employees on a gross basis.
Revenues from products, platforms and solutions have grown by 30%
QoQ, reflecting improved traction in non-linear revenues.
q We make changes to our FY12 estimates and FY13 estimates. We have assumed
the rupee at R52 / USD in 4Q and to average 50 / USD in FY13.
Consequently, we expect the EPS to be Rs.147 (Rs.142 earlier) in FY12 and
Rs.169 (Rs.155 earlier) in FY13, largely due to currency impact.
q In view of the uncertain macro scene, we are according a discount to the
average valuations prevalent during the past five years. Consequently,
our target price stands revised to Rs.3034 (Rs.2995 earlier).
q While the stock is expected to remain range-bound in the short term, we
remain positive on the medium - to - long term strategy of the company.
Management has reiterated its long term commitment to increase the
proportion of non-linear revenues. Infosys should benefit from the positive
change in client sentiments and the presence of various margin levers.
Maintain BUY.
q Recessionary conditions in the developed economies and a sharp appreciation
in the rupee beyond our estimates are the key risks to our revised
earnings estimates and recommendation.
Revenue growth at lower end of the guided band
n Revenues for the quarter came in at the lower end of the guided band. Growth
in CC terms was 4.4% QoQ.
n Volumes grew by 3% on a sequential basis, which was similar to our expectations.
While cross currency movements impacted USD revenue growth, average
realization increases compensated for the same.
n Average realisations improved by about 80bps on a weighted average basis. The
improvement in realisations was a pleasant surprise.
n Revenue growth came largely from Europe, which surprisingly reported a CC
growth of 16.8%. The high growth in Europe was a result of the investments
which Infosys has made. The company has opened offices in France and Germany
apart from adding senior resources.
n However, we believe that, 3Q growth rates may be difficult to replicate.
QoQ Growth in geographies (Constant Currency terms)
(Rs mn) 3QFY12 2QFY12
North America 1.1 6.3
Europe 16.8 2.1
ROW 2.5 7.3
Source : Company
n In terms of verticals, the growth was more secular with all verticals reporting a
growth of 3% - 6% QoQ.
n Infosys has been investing heavily in verticals like Life Sciences and Healthcare
(investment verticals), which reported high growth during the quarter. Energy
and Utilities also reported a decent growth QoQ.
n All these verticals continued to witness scale up in existing accounts and also
added significant new clients during the quarter
Large deals continue
n Infosys continued to win new large deals and had a total of 5 new deals in 3Q (4
in 2Q). Two of these deals were of more than $500mn each.
n In addition to these the company won one transformational deal (2 in 2Q).
n With discretionary spends witnessing moderation, the transformational deals flow
is expected to slow down.
New deals won based on platforms - TCV of $300mn
n Infosys has been focusing on products, platforms and solutions (PPS) with a view
to provide better value to customers and convert their capex to opex.
n The focus on PPS is also expected to ease the pressure on margins for Infosys in
the medium to long term.
Revenue growth- Services wise
(Rs mn) 3QFY12 2QFY12 QoQ (%) 3QFY11 YoY (%)
Business operations 59,786 52,077 14.8 44,484 34.4
As a % of revenues 64.3 64.3 62.6
Consul & SI 28,452 25,269 12.6 22,384 27.1
As a % of revenues 30.6 31.2 31.5
Products, PF, Solns 4,742 3,645 30.1 3,979 19.2
As a % of revenues 5.1 4.5 5.6
Total revenues 92,980 80,990 14.8 70,848 31.2
Source : Company
n During 2Q, Infosys had launched Infosys Edge, a suite of 9 platforms, some of
which were re-launched.
n Infosys is also seeing increased traction in Finacle, which won 10 deals in 3Q.
The cloud practice is also getting new clients with 15 deals during the quarter.
n The company already has contracts totaling to $300mn (total contract value -
TCV), which are based on these platforms and which are to be executed over
the next 3 - 5 years.
n We see this segment as a critical piece of Infosys' strategy to sustain margins as
well as revenue growth in the future.
Average realisations higher - encouraging
n Average blended realisations on a CC basis were higher by 0.80%. This comes
on top of the 1% improvement seen in 2Q.
n The management indicated mix change as the main reason for the improvement
in off-shore realisations. Apart from mix change, billing rate increases in some
accounts also brought about the QoQ growth.
n We see this like-to-like increase as an encouraging sign amid challenging macro
scene.
n We also note that, revenues from PPS grew by 30% QoQ and would also have
contributed marginally to this.
Margins improved - currency at play
n Infosys reported a 300bps improvement in EBIT margins, which was above expectations.
n This was largely due to the rupee depreciation, which added 440bps to the margins.
n A part of this improvement was compensated by higher expenditure towards
employees and sub-contractors.
n We had expected higher re-investment of the currency gains in business generating
initiatives.
n The company added 3,266 employees on a net basis and maintained utilization
rates at about 77.4%.
n The management has indicated that, it will be comfortable with utilization rates
of between 76% - 80%. It has earlier indicated a range of 78% - 82%.
Other income component in line with estimates
n The other income component came almost in line with our estimates.
n The company suffered a loss of about Rs.200mn due to currency fluctuations.
n Infosys has hedges worth $877mn as at 3Q end as against $742mn at the end of
the previous quarter.
INR-based guidance revised upwards and USD based guidance
downwards
n Infosys has increased the INR-based guidance significantly. This is solely due to
the currency fluctuations, we understand.
n The revenue guidance in USD terms for 4Q is almost similar to the 3Q revenues,
indicating flat growth.
n We find this disappointing and see this as a reflection of the near term uncertainties.
n We understand that, the company has experienced further delays in decision
making and in project scale-ups during 3Q. The management has been sounding
caution as far as the macro scene is concerned.
n This has resulted in the company achieving only the lower end of the guided
revenues in 3Q and has made the management more cautious. To that extent,
some extra caution is built in the 4Q guidance, we opine.
n Consequently, USD revenue growth guidance for FY12 has been reduced from
17.1% - 19.1% to 16.4% for FY12. A part of this reduction (0.5% / 0.6%) may
be due to the cross-currency movements, we believe.
Some positives give hope for FY13
n The client budgets for CY12 are expected to be finalized on time (mid-February)
and they are expected to be flat or marginally lower YoY. The offshoring component
in the same is expected to increase.
n While the company has witnessed delays, there have been no project cancellations,
according to the management.
n The clients are willing to take short term decisions, even as long term calls are
being avoided.
n The sharp rise in European revenues in 3Q (while not being a secular trend) does
indicate that, the off-shoring initiatives may increase in case there are no defaults
/ bankruptcies.
n The company has added 49 customers in 3Q, taking the total to 120 for the fiscal.
Also, it is winning large deals (5 in 3Q). These deals will likely scale up in
the next few quarters.
n With Infosys focusing on non-linear initiatives, the segment has achieved a 30%
QoQ growth in INR revenues in 3Q, albeit on a small base.
n We see this as an important lever for growth as well as margin sustenance in the
future quarters. Infosys has won several clients in these areas in FY13.
n Thus, while there may be challenges in the short term as reflected in the 4Q
guidance, these factors may lead to better growth rates in future quarters.
Financial estimates
n We have made changes to our FY12 and FY13 estimates.
n We have kept most assumptions unchanged. However, we have assumed the
rupee to average 52 / USD in 4QFY12 and 50 / USD in FY13.
n For FY13, we have assumed volume growth to be 14%. We expect margins to
be impacted by the rupee and salary increments. Better utilization levels may restrict
the impact to about 50bps, we estimate.
n With tax rates expected to be at about 28% of PBT, PAT is expected to grow by
about 14%. EPS is expected to be at about Rs.169. The assumption of the rupee
has impacted our FY13 estimates positively.
Valuations and recommendations
n In view of the uncertain macro scene, we are according a discount to the average
valuations prevalent during the past five years.
n Consequently, our target price stands revised to Rs.3034 based on FY13E earnings
(Rs.2995 earlier).
n At our target price, our FY13 earnings will be discounted by 18x.
n We note that, significant currency fluctuations may have an impact on our expectations
and hence, also the price target.
n We remain positive on the medium - to - long term strategy of the company.
Management has reiterated its long term commitment to increase the proportion
of non-linear revenues.
n We concur with the management's view that this is necessary to ensure profitable
growth, while providing more value to customers. Post the recent reorganization,
there is greater emphasis on products, platforms and solutions. We remain
optimistic on the company's future prospects, led by a strong management
team and Maintain BUY.
n However, in the short term, the stock may remain range-bound due to disappointment
over the 4Q guidance and due to the uncertain macro.
Concerns and risks
n A sharp appreciation in the rupee against various currencies will impact our earnings
estimates.
n Recessionary conditions in developed economies will likely impact future revenue
growth and profitability of the company.
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