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Infosys (INFO) reported a 3.1% volume growth in 3QFY12, lower than its implied volume growth guidance of
4.2-6.4% (our est. of 4% volume growth)
USD revenue growth of 3.4% and EBIT margin expansion of 300bp were ahead of street expectations (our
expectations of 260bp increase), largely driven by a higher INR realization v/s estimates (INR51.37/USD v/s
our estimate of INR50.5/USD). USD revenue growth guidance of 0-0.2% growth for 4Q implies a 0.5-0.7%
volume growth (guidance assumes a 50bp impact from cross currencies), which is disappointing.
Infosys' commentary during the quarter and 4Q guidance indicate rapid deterioration in the environment.
Key positives in 3Q are a 0.8% increase in revenue productivity in constant currency , 5 large deal wins with
2 deals having a TCV of over USD500m and 49 new client additions - the highest in many quarters. Post
conversations with offshore advisors we note that all vendors will report strong deal wins in the current
quarter, however client additions and deal wins from 4QFY12 onwards will be critical.
The currency trade is now over and the market will increase its focus on Infosys' core business fundamentals.
We cut our USD revenue growth estimates for FY13 to 10.5% from 13.6% earlier. We also increase our INR
assumption to INR50/USD from INR48/USD earlier. Our EPS estimates remain unchanged at INR161.3. Assuming
a worst case multiple of 16x FY13E, INR2,580/share is the worst case valuation for the stock.
We maintain our P/E multiple of 20x on the stock despite the deterioration as we will rollover our estimates
to FY14 next quarter. We reiterate our Buy rating with a target price of INR3,225.
3QFY12 beat largely driven by currency; volume growth of 3.1% below
implied guidance of 4.2-6.4%
Infosys' headline numbers for 3QFY12 were ahead of estimates. However the
outperformance was largely driven by a weaker than expected INR realization, which
boosted both revenues and margins. Europe, which grew 14% QoQ, was the biggest
contributor during the quarter accounting for 84% of the incremental revenue. From
a vertical perspective, Manufacturing grew 4.8% QoQ and accounted for 26% of
incremental revenues; while ADM and Products drove the revenues among
horizontals. Key disappointments were Telecom, which declined 2.5% QoQ and
revenues from top customer, which was down 8% QoQ.
11% QoQ depreciation of the INR was a key tailwind for margins, which had a 440bp
positive impact. 140bp increase in operating costs limited the EBIT margin expansion
to 300bp QoQ. Hedge losses were also lower at INR200m v/s our expectation of
INR600m.
Management commentary indicates a slowdown in discretionary spends, delay in
decision making and ramp up of new projects. This is also clearly visible in Infosys'
portfolio with consulting and PI growing by 1.4% QoQ (lower than company growth).
Infosys added 49 new clients during the quarter - the highest in over 14 quarters; the
company also won 5 large deals - 2 with a TCV > USD500m.
4Q guidance of 0-0.2% QoQ is disappointing - reflects deterioration in business
momentum; While Infosys reported strong deal wins, the company has seen a
deterioration in the environment in the last quarter. The company had issued a warning
stating that revenue growth could be at the lower end of the guidance
Other highlights
Added 49 clients during the quarter - the highest number of additions in any
quarter
Outstanding hedges stand at USD877m, v/s USD742m in 2Q. Hedging policy remains
unchanged as the company continues to cover two quarters forward of net inflows.
Contribution of Fixed Price contracts to revenues increased 320bp QoQ to 40.9%
Active clients at the end of the quarter increased by 18 to 665
The company added 9,655 people on a gross basis, 3,863 of which were laterals.
LTM attrition rate was 15.4%.
DSO days were flat at 61.
Infosys is the second largest IT Services Company in India
with revenues of around US $6.0b and employing over
145,000 people. Infosys defines designs and delivers IT
enabled business solutions that help many Global 2000
companies to win in a flat world. Infosys has a global
footprint in 23 countries and development centers in
India, China, Australia, the UK, Canada and Japan.
Company's service offerings span business and
technology consulting, ADM, SI, product engineering, IT
infrastructure services and BPO.
Key investment arguments
Most profitable company amongst frontline Indian
IT companies
Wide services offering profile and deep domain
depth
Key investment risks
Appreciation in rupee could hamper profitability.
Greater deterioration in environment from factors
like an event shock
Recent developments
The company won 5 large deals and 1
transformational deal during the quarter
10 client wins in Finacle and 14 in Europe in 3QFY12.
Valuation and view
Revenue and EPS CAGR of 13.4% and 16.2%
respectively, over FY11-FY13.
Valuations at 17.6x FY12E and 16x FY13E.
Maintain Buy with a price target of INR3,225, based
on 20x FY13E earnings
Sector view
In the last few months, increasingly weak macro
economic data has been emanating from both the
US and Europe, which implies deceleration in growth
for Indian IT Services.
While CY12 budgets are yet to be hinted, we expect
a moderation in growth across the sector, resulting
from a possible 3-4% cut in budgets as in 2003 (v/s 6-
8% in CY08).
We reckon frontline Indian IT companies would be
better placed to sail through the near term
adversities mentioned above. Niche IT/ITeS services
companies with strong business models are also
likely to be better placed to face uncertainties in
near term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys (INFO) reported a 3.1% volume growth in 3QFY12, lower than its implied volume growth guidance of
4.2-6.4% (our est. of 4% volume growth)
USD revenue growth of 3.4% and EBIT margin expansion of 300bp were ahead of street expectations (our
expectations of 260bp increase), largely driven by a higher INR realization v/s estimates (INR51.37/USD v/s
our estimate of INR50.5/USD). USD revenue growth guidance of 0-0.2% growth for 4Q implies a 0.5-0.7%
volume growth (guidance assumes a 50bp impact from cross currencies), which is disappointing.
Infosys' commentary during the quarter and 4Q guidance indicate rapid deterioration in the environment.
Key positives in 3Q are a 0.8% increase in revenue productivity in constant currency , 5 large deal wins with
2 deals having a TCV of over USD500m and 49 new client additions - the highest in many quarters. Post
conversations with offshore advisors we note that all vendors will report strong deal wins in the current
quarter, however client additions and deal wins from 4QFY12 onwards will be critical.
The currency trade is now over and the market will increase its focus on Infosys' core business fundamentals.
We cut our USD revenue growth estimates for FY13 to 10.5% from 13.6% earlier. We also increase our INR
assumption to INR50/USD from INR48/USD earlier. Our EPS estimates remain unchanged at INR161.3. Assuming
a worst case multiple of 16x FY13E, INR2,580/share is the worst case valuation for the stock.
We maintain our P/E multiple of 20x on the stock despite the deterioration as we will rollover our estimates
to FY14 next quarter. We reiterate our Buy rating with a target price of INR3,225.
3QFY12 beat largely driven by currency; volume growth of 3.1% below
implied guidance of 4.2-6.4%
Infosys' headline numbers for 3QFY12 were ahead of estimates. However the
outperformance was largely driven by a weaker than expected INR realization, which
boosted both revenues and margins. Europe, which grew 14% QoQ, was the biggest
contributor during the quarter accounting for 84% of the incremental revenue. From
a vertical perspective, Manufacturing grew 4.8% QoQ and accounted for 26% of
incremental revenues; while ADM and Products drove the revenues among
horizontals. Key disappointments were Telecom, which declined 2.5% QoQ and
revenues from top customer, which was down 8% QoQ.
11% QoQ depreciation of the INR was a key tailwind for margins, which had a 440bp
positive impact. 140bp increase in operating costs limited the EBIT margin expansion
to 300bp QoQ. Hedge losses were also lower at INR200m v/s our expectation of
INR600m.
Management commentary indicates a slowdown in discretionary spends, delay in
decision making and ramp up of new projects. This is also clearly visible in Infosys'
portfolio with consulting and PI growing by 1.4% QoQ (lower than company growth).
Infosys added 49 new clients during the quarter - the highest in over 14 quarters; the
company also won 5 large deals - 2 with a TCV > USD500m.
4Q guidance of 0-0.2% QoQ is disappointing - reflects deterioration in business
momentum; While Infosys reported strong deal wins, the company has seen a
deterioration in the environment in the last quarter. The company had issued a warning
stating that revenue growth could be at the lower end of the guidance
Other highlights
Added 49 clients during the quarter - the highest number of additions in any
quarter
Outstanding hedges stand at USD877m, v/s USD742m in 2Q. Hedging policy remains
unchanged as the company continues to cover two quarters forward of net inflows.
Contribution of Fixed Price contracts to revenues increased 320bp QoQ to 40.9%
Active clients at the end of the quarter increased by 18 to 665
The company added 9,655 people on a gross basis, 3,863 of which were laterals.
LTM attrition rate was 15.4%.
DSO days were flat at 61.
Infosys is the second largest IT Services Company in India
with revenues of around US $6.0b and employing over
145,000 people. Infosys defines designs and delivers IT
enabled business solutions that help many Global 2000
companies to win in a flat world. Infosys has a global
footprint in 23 countries and development centers in
India, China, Australia, the UK, Canada and Japan.
Company's service offerings span business and
technology consulting, ADM, SI, product engineering, IT
infrastructure services and BPO.
Key investment arguments
Most profitable company amongst frontline Indian
IT companies
Wide services offering profile and deep domain
depth
Key investment risks
Appreciation in rupee could hamper profitability.
Greater deterioration in environment from factors
like an event shock
Recent developments
The company won 5 large deals and 1
transformational deal during the quarter
10 client wins in Finacle and 14 in Europe in 3QFY12.
Valuation and view
Revenue and EPS CAGR of 13.4% and 16.2%
respectively, over FY11-FY13.
Valuations at 17.6x FY12E and 16x FY13E.
Maintain Buy with a price target of INR3,225, based
on 20x FY13E earnings
Sector view
In the last few months, increasingly weak macro
economic data has been emanating from both the
US and Europe, which implies deceleration in growth
for Indian IT Services.
While CY12 budgets are yet to be hinted, we expect
a moderation in growth across the sector, resulting
from a possible 3-4% cut in budgets as in 2003 (v/s 6-
8% in CY08).
We reckon frontline Indian IT companies would be
better placed to sail through the near term
adversities mentioned above. Niche IT/ITeS services
companies with strong business models are also
likely to be better placed to face uncertainties in
near term.
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