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Infosys (INFO)
Technology
Weak 4QFY12 guidance dampens outlook but should it? Even as we share Street’s
disappointment on Infosys’ weak 4QFY12 flat revenue growth guidance, we remain
positive on demand environment for the industry. We do not see weakness at Infosys as
a broader industry challenge – portfolio issues at Infosys are at play, in our view. We
incorporate Infosys’ volume challenge and cut our revenue growth estimates for the
company. Nonetheless, valuation post the correction appears attractive at 14.5X
FY2013E EPS. Retain BUY with a reduced TP of Rs3,100/share (Rs3,300 earlier).
What to make out of Infosys’ muted 4QFY12 sequentially flat revenue guidance?
The only change in demand environment commentary from Infosys management on 3QFY12
earnings call versus 2QFY12’s was a ‘marginal’ deterioration in decision-making pace among
clients. Here’s the trouble though – the ‘marginal’ deterioration has meant a US$51-167 mn cut in
2HFY12E revenues (assuming Infosys meets the mid-point of its 4Q guidance range). In effect, a
1.4-4.4% cut in 2HFY12E revenues versus earlier guidance. In an already uncertain environment,
fears of what a more meaningful deterioration might lead to, clearly spooked the Street, driving a
8.4% decline in the stock price post results.
Given this, a few questions arise – (1) whether the environment has deteriorated more than what
Infosys’ commentary is suggesting, (2) whether the issues are Infosys-specific or reflective of
broader industry issues, and (3) has Infosys overcorrected its 4Q guidance for frequent miss on
volume guidance in the past few quarters? It would take a while for clear answers to emerge but
recent history of Infosys’ performance versus guidance could keep the Street worried on questions
(1) and (2); benefit of doubt on the 3rd aspect can be ruled out. Infosys’ weak guidance is a
combination of some deterioration in demand environment and certain Infosys-specific issues, in
our view. However, we would refrain from using 4QFY12 guidance as a base for FY2013E revenue
growth forecasts for the industry and Infosys. We discuss this in detail later in the note.
3QFY12 results were robust but overshadowed by weak 4Q guidance
3QFY12 revenues grew 3.4% qoq to US$1,806 mn, in line with our estimate. Revenue growth
was impacted by adverse cross currency movement of 100 bps; effectively constant currency
growth was 4.4%. Onsite pricing improved materially by 2.3% qoq on constant currency terms.
Revenue growth was broad-based barring weak performance from the telecom vertical. EBITDA
margins increased by 260 bps qoq due to Rupee depreciation; note that the company has not
utilized any operational levers to shore up margins. Margin gain was partly pricing-led. Net income
of Rs23.72 bn (+24.4% qoq, +33.3% yoy) was higher than our estimate primarily on margin beat.
Maintain BUY rating on attractive valuations
We cut revenue growth estimate by 1.8% points to 13.6% and EPS estimate by 1.4% to
Rs178/share for FY2013E. We cut our target multiple to 17.4X from 18.3X and target price
to Rs3,100/share. Valuation multiple assigned for Infosys is based on the mid-range of the
mid-cycle multiple of 16-18X. We elaborate below our rationale for 13.6% growth for
Infosys for FY2013E despite disappointing guidance of flat revenues (marginal decline
organically) for the March 2012 quarter.
What could have led to weak 4QFY12 outlook and why do we still have FY2013E
revenue growth estimate at 13.6% (implying a 4% CQGR from 1Q-4QFY13E)
Following factors may have led to weak outlook for the March 2012 quarter
Closer scrutiny of IT budgets and even cutback in spending among US financial services
clients. We note that the impact of this will hurt other IT companies as well
Portfolio issues. We understand that ramp-down from an European telco may be still
hurting performance, and
Cutback in projects and slowdown in spending by mid-November may have lead to
significant loss of momentum in November/ December, impact of which may have spilled
over to March 2012 quarter.
Uncertainty hurts; uncertainty in a seasonally weak quarter may end up making numbers (in
this case, the March 2012 guidance) look ugly. A 1-2% revenue growth guidance would
have kept the Street happy; a flat revenue outlook did not, and showed in 8.4% stock
decline today. Point is that the margin for error is extremely low in seasonally weak quarters.
However, a minor miss in a seasonally weak quarter should not form the basis of growth
forecast. From weak 4Q there are several mitigating factors including
While IT budgets for 2012 may be down, management indicated good progress on
closure of IT budgets. This view is corroborated by other players in the industry as well.
We highlight that the direction of budgets (whether up, down or flat) is important, but
we believe a normal decision-making cycle is more critical to the fortunes of offshore
names, whose growth primarily comes due to market share gains and not market growth.
Progress on the same is encouraging;
Continued positive surprise and resilience of the US economy;
Spending on discretionary projects typically picks in June and September quarters;
FY2013E should be no different;
Strong pipeline and large transformational deal wins.
Healthy pricing increase
Infosys’ onsite pricing increased 1.4% qoq, 2.3% in constant currency. Offshore pricing also
increased in constant currency. Infosys’ pricing in 9MFY12 has increased by 6.2%. We are
encouraged by pricing increases reported by the company in a challenging environment; this
indicates early success in ability to up-sell and shift business mix to profitable segments. We
also note that the company has not pulled in any levers to increase margins in 3QFY12.
Guidance for 4QFY12 weak
Infosys cut FY2012E revenue growth guidance to 16.4% from 17-19% earlier. The company
has cited macro factors as the reason though this does not tie in with their performance in
US (weak despite strong data points in US) and Europe (strong performance despite
weakness in the economy). EPS guidance revision to Rs147 from Rs143-145 is primarily
Rupee-driven; guidance based on Re/US$ rate of 52 for 4QFY12.
Other details
Infosys maintained its gross hiring guidance of 45,000 for FY2012E. It hired a gross 9,655
employees in 3QFY12 taking the total in 9MFY12 to 34,929.
Outstanding hedges at end-Sep 2011 stood at US$877 mn, up slightly from US$742 mn
at end-June 2011.
Attrition on a quarterly annualized basis came down to 17.8% from 20.6% in the
previous quarter – this is still outside the company’s comfort zone.
The company ended the quarter with a cash of US$3.7 bn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys (INFO)
Technology
Weak 4QFY12 guidance dampens outlook but should it? Even as we share Street’s
disappointment on Infosys’ weak 4QFY12 flat revenue growth guidance, we remain
positive on demand environment for the industry. We do not see weakness at Infosys as
a broader industry challenge – portfolio issues at Infosys are at play, in our view. We
incorporate Infosys’ volume challenge and cut our revenue growth estimates for the
company. Nonetheless, valuation post the correction appears attractive at 14.5X
FY2013E EPS. Retain BUY with a reduced TP of Rs3,100/share (Rs3,300 earlier).
What to make out of Infosys’ muted 4QFY12 sequentially flat revenue guidance?
The only change in demand environment commentary from Infosys management on 3QFY12
earnings call versus 2QFY12’s was a ‘marginal’ deterioration in decision-making pace among
clients. Here’s the trouble though – the ‘marginal’ deterioration has meant a US$51-167 mn cut in
2HFY12E revenues (assuming Infosys meets the mid-point of its 4Q guidance range). In effect, a
1.4-4.4% cut in 2HFY12E revenues versus earlier guidance. In an already uncertain environment,
fears of what a more meaningful deterioration might lead to, clearly spooked the Street, driving a
8.4% decline in the stock price post results.
Given this, a few questions arise – (1) whether the environment has deteriorated more than what
Infosys’ commentary is suggesting, (2) whether the issues are Infosys-specific or reflective of
broader industry issues, and (3) has Infosys overcorrected its 4Q guidance for frequent miss on
volume guidance in the past few quarters? It would take a while for clear answers to emerge but
recent history of Infosys’ performance versus guidance could keep the Street worried on questions
(1) and (2); benefit of doubt on the 3rd aspect can be ruled out. Infosys’ weak guidance is a
combination of some deterioration in demand environment and certain Infosys-specific issues, in
our view. However, we would refrain from using 4QFY12 guidance as a base for FY2013E revenue
growth forecasts for the industry and Infosys. We discuss this in detail later in the note.
3QFY12 results were robust but overshadowed by weak 4Q guidance
3QFY12 revenues grew 3.4% qoq to US$1,806 mn, in line with our estimate. Revenue growth
was impacted by adverse cross currency movement of 100 bps; effectively constant currency
growth was 4.4%. Onsite pricing improved materially by 2.3% qoq on constant currency terms.
Revenue growth was broad-based barring weak performance from the telecom vertical. EBITDA
margins increased by 260 bps qoq due to Rupee depreciation; note that the company has not
utilized any operational levers to shore up margins. Margin gain was partly pricing-led. Net income
of Rs23.72 bn (+24.4% qoq, +33.3% yoy) was higher than our estimate primarily on margin beat.
Maintain BUY rating on attractive valuations
We cut revenue growth estimate by 1.8% points to 13.6% and EPS estimate by 1.4% to
Rs178/share for FY2013E. We cut our target multiple to 17.4X from 18.3X and target price
to Rs3,100/share. Valuation multiple assigned for Infosys is based on the mid-range of the
mid-cycle multiple of 16-18X. We elaborate below our rationale for 13.6% growth for
Infosys for FY2013E despite disappointing guidance of flat revenues (marginal decline
organically) for the March 2012 quarter.
What could have led to weak 4QFY12 outlook and why do we still have FY2013E
revenue growth estimate at 13.6% (implying a 4% CQGR from 1Q-4QFY13E)
Following factors may have led to weak outlook for the March 2012 quarter
Closer scrutiny of IT budgets and even cutback in spending among US financial services
clients. We note that the impact of this will hurt other IT companies as well
Portfolio issues. We understand that ramp-down from an European telco may be still
hurting performance, and
Cutback in projects and slowdown in spending by mid-November may have lead to
significant loss of momentum in November/ December, impact of which may have spilled
over to March 2012 quarter.
Uncertainty hurts; uncertainty in a seasonally weak quarter may end up making numbers (in
this case, the March 2012 guidance) look ugly. A 1-2% revenue growth guidance would
have kept the Street happy; a flat revenue outlook did not, and showed in 8.4% stock
decline today. Point is that the margin for error is extremely low in seasonally weak quarters.
However, a minor miss in a seasonally weak quarter should not form the basis of growth
forecast. From weak 4Q there are several mitigating factors including
While IT budgets for 2012 may be down, management indicated good progress on
closure of IT budgets. This view is corroborated by other players in the industry as well.
We highlight that the direction of budgets (whether up, down or flat) is important, but
we believe a normal decision-making cycle is more critical to the fortunes of offshore
names, whose growth primarily comes due to market share gains and not market growth.
Progress on the same is encouraging;
Continued positive surprise and resilience of the US economy;
Spending on discretionary projects typically picks in June and September quarters;
FY2013E should be no different;
Strong pipeline and large transformational deal wins.
Healthy pricing increase
Infosys’ onsite pricing increased 1.4% qoq, 2.3% in constant currency. Offshore pricing also
increased in constant currency. Infosys’ pricing in 9MFY12 has increased by 6.2%. We are
encouraged by pricing increases reported by the company in a challenging environment; this
indicates early success in ability to up-sell and shift business mix to profitable segments. We
also note that the company has not pulled in any levers to increase margins in 3QFY12.
Guidance for 4QFY12 weak
Infosys cut FY2012E revenue growth guidance to 16.4% from 17-19% earlier. The company
has cited macro factors as the reason though this does not tie in with their performance in
US (weak despite strong data points in US) and Europe (strong performance despite
weakness in the economy). EPS guidance revision to Rs147 from Rs143-145 is primarily
Rupee-driven; guidance based on Re/US$ rate of 52 for 4QFY12.
Other details
Infosys maintained its gross hiring guidance of 45,000 for FY2012E. It hired a gross 9,655
employees in 3QFY12 taking the total in 9MFY12 to 34,929.
Outstanding hedges at end-Sep 2011 stood at US$877 mn, up slightly from US$742 mn
at end-June 2011.
Attrition on a quarterly annualized basis came down to 17.8% from 20.6% in the
previous quarter – this is still outside the company’s comfort zone.
The company ended the quarter with a cash of US$3.7 bn.
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