Infosys Technologies - Black Friday :Macquarie Research,

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Infosys Technologies
Black Friday
Event
 We downgrade Infosys to Neutral. Infosys disappointed the market by
missing its muted 4Q guidance and providing FY13 outlook that would lead to
earnings downgrade across the street. While the stock declined 12% on
Friday, we do not see value emerging given the bleak growth prospects.
Better earnings performance from other IT vendors during the next two weeks
can further weaken the investment argument for Infosys.
Impact
 Is Infosys FY13 guidance conservative? We do not think that Infosys mgmt
is building in extra caution while guiding for 8-10% US$ revenue growth next
year. Given the delay in new project launches seen by Infosys in March, we
think a significant beat on 1Q guidance is difficult. This implies the CQGR ask
rate for the remaining three quarters to meet the 10% growth target would be
5%. With a fluid macro environment and the company facing a slowdown in its
largest vertical, chances of beating the 5% CQGR are slim, in our view.
 Global tech results and Infy guidance – the disconnect. The CEO
mentioned on the call that higher share of discretionary revenues makes the
comp vs. other Indian vendors tough. While the Infy client portfolio is slightly
more skewed to discretionary services, the data point on new software license
sales from software vendors and Accenture consulting order guidance
indicate stable discretionary spend scenario.
 Estimate changes. We now forecast 9% US$ revenue growth for FY13 (vs.
12.5% earlier). Infosys has guided for 50-100bps margin decline, largely on
account of lower utilisation in FY13. The decision to keep wages flat provides
a margin cushion to the company. This, coupled with weak INR (forex
estimates unchanged) should restrict margin erosion to 20bps, in our view.
 Sector implications: Sequential decline at the BFSI vertical and North
American geo were the key 4Q disappointments and cast worries on vendors
with exposure to this vertical/geo. Our understanding from the Infy earnings
call was that it’s possible other vendors addressing different portfolios at the
same client might have not been affected by the ramp downs. Definite proof of
this is likely in the results from other vendors over next two weeks.
Earnings and target price revision
 We have reduced our FY13/FY14 EPS by 4%. Our new DCF-based target
price of Rs2,450 (was Rs2,950) implies a target PER multiple of 15x.
Price catalyst
 12-month price target: Rs2,450.00 based on a DCF methodology.
 Catalyst: Up: Raise in FY13 guidance, Down: Superior results from peers
Action and recommendation
 We do not think the 12% sell-off is overdone and rate the stock Neutral.
Investors looking to shift weight should consider TCS and Wipro, in that order.