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Guidance disappoints but stock correction exaggerated
Infosys stock has corrected by ~8% today, compared to a 0.8% fall in the
SENSEX on its guidance disappointment (cut in FY12F revenue growth
guidance and flat revenue growth guidance for 4QFY12F), despite
ahead-of-consensus results. We think the stock price correction is
exaggerated and do not expect to see any material change to our TP or
estimates as: 1) our revenue growth estimate of 13% in FY13F already
factors in demand moderation from the slowness in client decision
making, 2) we believe there is no structural impairment of demand – as
reflected in management commentary that clients have the budget, but
are only cautious in spending it, 3) pricing has increased on a constant
currency basis and management sees a stable outlook – which we think
counters fears of a pricing-related de-rating in valuation multiples and
4) cost moderation accompanying growth moderation and rupee
depreciation would lead to EPS growth ahead of USD revenue growth in
FY13F, on our estimates. We maintain our BUY rating with a TP of
INR3,300 and prefer Infosys over TCS/Wipro.
Positive demand indications and traction in Europe/client mining
Five large deals (with two greater than US$500mn in total contract
value), 49 new client additions in 3Q of which ~14 in Europe, strong
growth in Europe (17% q-q growth in constant currency terms), strong
growth in products (18% q-q growth), traction in non top-five accounts
(growth ahead of company average) are positive indications, in our view,
and indicate to us that Infosys’ restructuring has started to yield results.
We believe demand moderation in package implementation and
consulting is largely due to the macro-economic environment and slow
decision making, and we expect this to correct during the course of
FY13F as decision making velocity improves.
Pain in top clients at Infosys could imply similar pain at TCS
Infosys’s top client revenue share declined to 4.1% (from 4.6%) – which
indicates some pain in the Bank of America account. However, revenue
share from the top 6-10 clients have increased revenue contribution,
which indicates there continues to be broad-based momentum in growth,
in our view. Bank of America is a top-5 client at TCS too, and similar
issues might be present at TCS too, in our view. An additional concern is
TCS’ higher top client dependence (7% of revenue) and higher BFSI
dependence (44% of revenue).
Infosys likely to be the strongest results among tier 1 Indian IT
names
We continue to believe that Infosys’s result would be the strongest in 3Q
among tier 1 IT on parameters such as revenue growth, margin increase
and profit growth. This is partly because of lower hedging and lower
cross currency impacts. We continue to prefer Infosys over TCS and
Wipro.
Sixth consecutive quarter of constant currency pricing increase
Pricing on a constant currency (c-c) basis has gone up by 0.8% q-q in
3Q. This is the sixth consecutive quarter of constant currency pricing
increase seen by Infosys. This, coupled with management’s expectation
of stable pricing in FY13F, reinforces our view that pricing is not likely to
be materially impacted during this downturn. We believe that if the
street’s pricing-cut fears are addressed in the current quarter tier 1 IT
results, fears of a structural de-rating of the sector are likely to subside.
Business operations have grown in line with company average, IMS
growth encouraging
One of the investor concerns with Infosys has been that it is foregoing its
bread and butter application development and maintenance (ADM)/
testing/infrastructure management services (IMS) business growth in
pursuit of higher value-added growth. That fear has declined over the
past two quarters, in our view, as business operations has grown at
3.4% q-q (~4.4% in c-c terms) in 3Q and 6.3% q-q in 2Q, in line or ahead
of company average. IMS, where Infosys has lagged peers, has shown
growth of ~9% q-q, which is an encouraging sign, in our view.
Key warning signs where visibility would be sought
Flat growth in US and Rest of the World: Both US (0.9% q-q) and
ROW (0.4% q-q) were flattish in terms of growth, and management
outlook on the same would be sought in the call today.
Underlying reasons for flat revenue growth guidance in 4Q: Is it
top-five client issues continuing, non-recurrence of growth in Europe/
products or deterioration in US/ROW would be a key question probed?
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Guidance disappoints but stock correction exaggerated
Infosys stock has corrected by ~8% today, compared to a 0.8% fall in the
SENSEX on its guidance disappointment (cut in FY12F revenue growth
guidance and flat revenue growth guidance for 4QFY12F), despite
ahead-of-consensus results. We think the stock price correction is
exaggerated and do not expect to see any material change to our TP or
estimates as: 1) our revenue growth estimate of 13% in FY13F already
factors in demand moderation from the slowness in client decision
making, 2) we believe there is no structural impairment of demand – as
reflected in management commentary that clients have the budget, but
are only cautious in spending it, 3) pricing has increased on a constant
currency basis and management sees a stable outlook – which we think
counters fears of a pricing-related de-rating in valuation multiples and
4) cost moderation accompanying growth moderation and rupee
depreciation would lead to EPS growth ahead of USD revenue growth in
FY13F, on our estimates. We maintain our BUY rating with a TP of
INR3,300 and prefer Infosys over TCS/Wipro.
Positive demand indications and traction in Europe/client mining
Five large deals (with two greater than US$500mn in total contract
value), 49 new client additions in 3Q of which ~14 in Europe, strong
growth in Europe (17% q-q growth in constant currency terms), strong
growth in products (18% q-q growth), traction in non top-five accounts
(growth ahead of company average) are positive indications, in our view,
and indicate to us that Infosys’ restructuring has started to yield results.
We believe demand moderation in package implementation and
consulting is largely due to the macro-economic environment and slow
decision making, and we expect this to correct during the course of
FY13F as decision making velocity improves.
Pain in top clients at Infosys could imply similar pain at TCS
Infosys’s top client revenue share declined to 4.1% (from 4.6%) – which
indicates some pain in the Bank of America account. However, revenue
share from the top 6-10 clients have increased revenue contribution,
which indicates there continues to be broad-based momentum in growth,
in our view. Bank of America is a top-5 client at TCS too, and similar
issues might be present at TCS too, in our view. An additional concern is
TCS’ higher top client dependence (7% of revenue) and higher BFSI
dependence (44% of revenue).
Infosys likely to be the strongest results among tier 1 Indian IT
names
We continue to believe that Infosys’s result would be the strongest in 3Q
among tier 1 IT on parameters such as revenue growth, margin increase
and profit growth. This is partly because of lower hedging and lower
cross currency impacts. We continue to prefer Infosys over TCS and
Wipro.
Sixth consecutive quarter of constant currency pricing increase
Pricing on a constant currency (c-c) basis has gone up by 0.8% q-q in
3Q. This is the sixth consecutive quarter of constant currency pricing
increase seen by Infosys. This, coupled with management’s expectation
of stable pricing in FY13F, reinforces our view that pricing is not likely to
be materially impacted during this downturn. We believe that if the
street’s pricing-cut fears are addressed in the current quarter tier 1 IT
results, fears of a structural de-rating of the sector are likely to subside.
Business operations have grown in line with company average, IMS
growth encouraging
One of the investor concerns with Infosys has been that it is foregoing its
bread and butter application development and maintenance (ADM)/
testing/infrastructure management services (IMS) business growth in
pursuit of higher value-added growth. That fear has declined over the
past two quarters, in our view, as business operations has grown at
3.4% q-q (~4.4% in c-c terms) in 3Q and 6.3% q-q in 2Q, in line or ahead
of company average. IMS, where Infosys has lagged peers, has shown
growth of ~9% q-q, which is an encouraging sign, in our view.
Key warning signs where visibility would be sought
Flat growth in US and Rest of the World: Both US (0.9% q-q) and
ROW (0.4% q-q) were flattish in terms of growth, and management
outlook on the same would be sought in the call today.
Underlying reasons for flat revenue growth guidance in 4Q: Is it
top-five client issues continuing, non-recurrence of growth in Europe/
products or deterioration in US/ROW would be a key question probed?
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