Infosys :: ICICI Securities

Manages to reserve some upside for FY15
• Infosys reported an in line quarter led by growth in the Europe,
manufacturing and ECS business
• Constant currency (CC) revenues declined 0.4% led by pricing
(-0.8%) offset by volumes (0.4%) while dollar revenues declined
0.4% QoQ to $2,092 million, in line with our $2,091 million estimate
• EBIT margins improved 46 bps QoQ to 25.5% (24.7% estimate) while
net income came at | 2,992 crore vs. | 2,869 crore estimate
• FY15E $ revenue guidance of 7-9% was in line with our estimates

��

-->
Refocusing on traditional services as restructuring hurts…
Infosys, which historically earned revenues predominantly through
application development and maintenance services, had initiated Infosys
3.0 strategy, which aimed at deriving at least a third of its revenues from
IP-based products, platforms and solutions. However, the strategy did not
work as planned leading to below industry average growth during FY09-
14. While the traditional business clocked 13.3% revenue CAGR during
FY09-14 (12.1% company average), discretionary product portfolio
services dragged (9.5% ex-Lodestone). However, recently, the company
has refocused efforts on winning large outsourcing deals.
FY15 guidance conservative but ‘still’ lower than industry average…
For FY15E, though Infosys guided conservatively (7-9%) and could
exceed with ease, it could still lag industry average. Noticeably, Infosys
has missed its annual guidance in three of the last six years raising
concerns over its guidance building process. This could be attributed to
company specific issues, weakness in discretionary spends – higher
contribution (34%) relative to industry (19%) – and wallet share loss.
Further, deceleration in top, 5 and 10 clients growth (-0.6%, 7.1%, 8.7%
CAGR in FY09-14; vs. company average of 12.1%) dragged overall
revenue growth. Client mining was also sluggish as Infosys added 174
clients to $1 million bracket during FY09-14 vs. 196 during FY04-09.
Slower revenue growth hits margins, overtime…
During FY09-14, EBIT margins declined 564 bps to 24% vs. 29.7% in FY09
primarily led by slower revenue growth and deterioration in operational
metrics such as utilisation ex-trainees, which declined to 77.4% in FY14
vs. historical high of 80-81%, and attrition (highest ever, 18.7% in FY14).
Attrition continues to remain at elevated levels (rose 60 bps sequentially
in Q4) but is being addressed as Infosys announced a wage hike starting
April 1. We expect FY15E margins to improve 100 bps led by operating
efficiencies. Though margins could decline 250-300 bps in Q1FY15E led
by wage hikes and visa costs, Infosys expects to regain Q1 losses over
the remainder of FY15E, maintaining FY14 levels.
Significant currency volatility remains key risk to estimates…
The rupee depreciated 11% in FY14 & 14% in FY13, thus creating
significant margin tailwinds as 1% change in rupee creates 30-40 bps of
margin relief. Significant rupee appreciation could impact margin profile.
Growth revival remains a challenge; Maintain Hold
We estimate Infosys will report revenue, EPS CAGR of 8.4%, 10.4% over
FY14-FY16E (with average 25% EBIT margins in FY15-16E), slower than
18.2%, 12.2% reported in FY09-14 along with average 28.1% margins.
Consequently, we value the stock at 15.5x – applying 12% discount to its
FY09-14 1-year forward PE average of 17.7x – our FY16E estimate of | 227
to arrive at our |3550 price target. We maintain HOLD recommendation.