Infosys once again delivered disappointing numbers with Q1FY13
revenue dipping 1.1% in USD terms versus our and Street expectation of
0.5% QoQ growth. Further, the company also reduced FY13 revenue
growth guidance to atleast 5% from the earlier 8-10%. Pricing decline of
3.7% QoQ and one time reversal of USD15mn offset the surprisingly
strong 2.7% volume growth. It also did not issue next quarter guidance
citing uncertain macro environment and cited cross currency and pricing
decline reasons behind cut in yearly revenue guidance. Although we are
positively surprised by the strong volume guidance (9.5%), the sharp cut
in pricing has induced us to cut our growth and earnings estimates. We
remain cautious with an upward bias driven by attractive valuations at
12x FY14E earnings. Maintain ‘BUY’.
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Volume growth surprises although revenue growth disappoints
Infosys reported revenue of USD1,752mn (down 1.1% QoQ), which was well below
lower end of its guidance (USD1,771mn), Street (USD1,777mn) and our (USD1782mn)
estimates, although partly led by one time reversal of USD15mn in accrued revenues.
Strong volume growth of 2.7% was offset by pricing decline of 3.7% on reported basis.
Management attributed decline in consulting & system integration (QoQ decline of 5%)
as the prime reason for pricing decline.
Pricing mars guidance
Sharp cut in FY13 revenue growth guidance from 8-10% to at least 5% is primarily
driven by cross currency (1.5%) and pricing impact, although the company maintained
volume guidance of ~9.5% for FY13. We believe Infosys’ positive revenue growth (CC)
in North America, ROW, manufacturing and RCL verticals is a positive sign and also
expect pricing to improve marginally going forward, enabling higher revenue growth.
Outlook and valuations: Attractive; maintain ‘BUY’
We believe Infosys’ confidence in volume growth guidance (9.5%) is a positive and its
sporadic price cuts is a step in the right direction, enabling it to maintain market share
going forward. We are building in USD revenue growth of 6%/11% for FY13E/FY14E, and
cutting our EPS for FY13/FY14 3.8% to INR166 and INR185, respectively, to factor in the
sharp pricing cut and revise our TP to INR2,590 (14x FY14E). We maintain ‘BUY/SP’.
Key highlights
• Reported revenue of USD1,752mn (down 1.1% QoQ) was below our estimate
(USD1,782mn). IT services posted a decent volume growth of 2.7%.
• Gross margin (42.2%) dipped 180bps sequentially while EBITDA margin (at 30.6%)
declined 200bps sequentially, largely due to higher onsite hiring (hired 700 during the
quarter) and higher visa cost. The ~380bps margin expansion due to INR depreciation
was largely negated by a sharp decline of ~370bps in pricing in reported currency.
• Net profit at INR22.9bn was down 1.4% QoQ due of lower operating profit. Net margin
for the quarter stood at 23.8% (down 240bps QoQ).
• Cuts FY13 guidance: Infosys has cut its FY13 revenue guidance to at least USD7.3bn,
implying revenue growth of 5% over FY12 versus earlier guidance of 8-10%. For FY13,
the company has increased its EPS guidance to atleast INR166.46 (at USD/INR rate of
55/USD) versus earlier guidanceINR158.76-161.41.
• Client addition: New client addition continues to be impressive with 51 clients added
during the quarter (52 in Q4FY12). Total active clientele now stands at 711 (against 694 in
previous quarter). The number of USD40mn clients increased by 3 to 53; there was an
increase in USD50mn (1), USD60mn (3), USD70mn (1) and USD200mn (1) client brackets
over the previous quarter. During the quarter, Infosys won four large deals, of which one
is over USD300mn.
• Mixed performance across client categories: Infosys’ top client declined 1.1%
sequentially while top 5 and 10 grew sequentially 4.1% and 2.6%, respectively. Beyond
top 10 clients declined 2.3% QoQ (in USD).
• Pricing takes a hit: In constant currency, while onsite pricing declined 2.8% QoQ,
offshore pricing declined 3.2% QoQ. On blended basis, pricing was down 3.2% QoQ.
Management attributed weakness in consulting & system integration (CSI) to pricing
decline during the quarter.
• Utilisation takes a dip: Including trainees, utilisation was flat QoQ at 67.2%; utilisation
(ex-trainees) declined 140bps to 71.6%. Attrition stood at 14.9% (14.7% in Q4FY12).
• Horizontals: CSl (30% of revenue) was the prime horizontal that led to decline as it
dipped 4.9% QoQ. ADM (38% of revenue) dipped 0.5% over the previous quarter.
Testing and infra management reported sequential growth of 5.3% each respectively.
• Vertical-wise performance: Manufacturing and retail & lifesciences (RCL) reported
sequential growth of 2.5% and 2.3%, respectively, while the largest vertical FSI declined
1.0% on sequential basis. Energy, utilities and communication (ECS) was down 8.2%
QoQ.
The FSI vertical continues to remain under pressure and the company witnessed
sporadic price discounts during the quarter.
In the energy vertical, Infosys reversed one-time accrued revenue of USD15mn as the
client cancelled one transformational programme.
Company Description
Infosys is the second-largest IT services company in India providing consulting and IT
services to clients globally. It is also among the fastest growing IT services organization in
the world and a leader in the offshore services space with a pioneer in Global delivery
model. Infosys provides business consulting, application development and maintenance and
engineering services to 711 active clients spread across Banking, Financial Services,
Insurance, Retail, Manufacturing, and Utilities verticals and 50 countries. The company has
also its own proprietary core banking software - Finacle used by some of the leading banks
in India, Middle East, Africa and Europe. Infosys’ total employee force stands at 151,151 and
the company’s TTM revenues stood at INR358.6bn (USD7.1bn).
Investment Theme
Infosys, in the recent past, lost market share to peers like TCS and HCL Technologies due to
lack of strong presence in Infrastructure management services, lack of presence in emerging
geographies and its aversion to provide flexibility in structuring contracts and offer
discounted pricing to clients. The restructuring exercise also led to some distractions which
led to slower growth compared to peers. We believe, it is unlikely to make a strong come
back and bridge the gap in revenue growth with peers but it is best placed to expand its
margins due to current low level of utilization and possibility of increase in offshore
execution coupled with higher contribution from non-linear business.
Key Risks
Key risks to our investment theme include – IT spending picks up and Infosys sheds its
conservatism and bids aggressively for large deals and improves its win rate.
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