Weak Q1FY13 – Trouble bottoming out: Top client’s ramp-down which
troubled Infosys through H2FY11 are bottoming out. The consistent
underperformance from top clients is reaching a nadir. We expect ramp-down
to spill over in H1FY13. We are factoring 1% negative impact due to the same
in Q2FY13.
New pricing strategy to boost volume growth: Infosys reported one of the
sharpest declines in realization, since the Lehman crisis. The realization dip in
Q1FY13 was attributed to multiple reasons like cross-currency (0.7%), revenue
write-back (0.9%) and portfolio shift (~0.4%). On a like-to-like business
comparison, pricing for Infosys declined by ~1.7% QoQ compared to TCS’
1.06% QoQ. We expect weakness in pricing environment to persist because of
two reasons: 1) Aggressive marketing to grab the market share 2)
Commoditized businesses have no nuances to offer to clients. However, the
pricing cut may or may not always be accompanied by volume growth.
Attributing realization dip to one particular reason is tough as there are
multiple moving parts to its calculation. We expect volume growth to pick-up
in H2FY13 (despite being seasonally weak quarter) as the new strategy (for
both vendor consolidation and new projects) would drive the growth for the
company post Q2FY13.
Strong client addition – Not captured in performance: Infosys added highest
number of clients among the peers over the last four quarters. However, the
quarterly performance didn’t add-up to the same. We expect ramp-up of
projects from the client win to result in a positive surprise. We expect the
ramp-up to start driving the growth for the company.
Event Risk – Cannot be ruled out: The month of August will witness the trial
of Jay Palmer case. Any verdict against Infosys could result in further
downside risk to the stock price. However, the language of the verdict remains
the key as it will clarify the doubt over deliberation.
Trough valuation to restrict further de‐rating: Infosys is currently trading at
13.1x FY14E earnings estimate, a trough valuation at which it traded post
Lehman crisis. Retain ‘BUY’ due to valuation comfort, with a target price of
Rs2,850.
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