Motilal Oswal: INFOSYS 4QFY12: Disappoints on all fronts; Back-ended nature of revenue expectation; Limited scope for beat on guided EPS; 5.7/4.3% cut in FY13/14 EPS estimates

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Infosys Technologies (INFO IN; Mkt Cap USD26.9b, CMP INR2,403, Buy)

Ashish Chopra

-      Infosys' 4QFY12 results disappointed on all fronts (1) Significant miss to 4Q revenue guidance,  (2) Weak outlook for FY13, yet requiring a high ask rate in seasonally weak quarters (4.9% CQGR over 2Q-4QFY13 to meet top-end of the guidance), and (3) tepid margin guidance despite doing away with wage hikes. All these do not just bode negatively for Infosys, but raise concerns on the FY13 growth prospects for the sector.

-      4QFY12 revenue declined 1.9% QoQ (2.1% in constant currency) to USD1,771m (v/s est of USD1,808m and  guidance of USD1,806-1,810m), on sudden and unexpected ramp downs in quite a few engagements within BFSI and in North America. EBIT margin declined 130bp QoQ to 29.9% (v/s est of 110bp decline to 30.1%). Higher other income (INR6.52b v/s est of INR4.6b) drove PAT outperformance (INR23.16b v/s est of INR22.77b).

-      Guidance of 8-10% YoY growth in USD revenues in FY13 came below even the most conservative estimates, especially after improving macro outlook in the US and 11-14% industry growth guidance given by NASSCOM. Achieving top-end of the lowly guidance too, appears a tall order given 0-1.1% QoQ growth guidance for 1Q, implying a 4.3-4.85% CQGR over 2Q-4Q, with 3Q and 4Q being seasonally weak quarters for the industry. Gross hiring guidance was 35,000 overall and 22,000 excluding BPO, implying 6,000 net additions (ex-BPO).

-      The company's decision against giving out wage hikes in FY13 was yet another surprise.  Despite that, and additional tailwind from 5.8% YoY depreciation in the INR v/s USD (at assumed INR rate of 50.88 for FY13, which is a 230bp tailwind to the margins), it guided for a margin decline of 50-100bp in FY13.

-      While a resurgence in growth could drive a much improved revenue performance, it will necessitate lateral hiring and wage hikes to keep the supply up with demand, implying further negative implications on profitability; making it difficult to build any beat to the company's guided EPS number of INR158.76-161.41.

-      We revise downwards our FY13/14 USD revenue estimates by 4.6%/4.5% and EPS estimates by 5.7%/4.3%. Infosys currently trades at 15x FY13E earnings; we see limited downside from current levels. However,  significant upside from current levels will warrant confidence around resurgence in growth, the earliest likelihood for which would be guidance for a healthy 2Q. Our revised TP is INR2,883 (16x FY14E EPS). Buy.

Infosys Technologies: Valuation summary