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Infosys Technologies Limited
INFY: Reducing Estimates Largely On Margin
Disappointment
SUMMARY
INFY's FY12 revenue guidance of 18-20% growth appears reasonable although
dependent on 2Q/3Q sequential acceleration. We expected some operating margin
degradation, but the severity implicit in guidance is disappointing and hard to
reconcile, absent incremental investments. Consistent with INFY's revenue
guidance, we remain optimistic about industry demand trends heading into FY12.
We also view INFY's margin/EPS guidance as largely company-specific and not
reflective of increased competition/pricing pressure. We reduce our FY12E EPS by
5% and introduce an FY13E EPS, which suggests 11% EPS growth and assumes
further modest margin degradation. This note supplements our earlier note today.
KEY POINTS
n EPS for 4Q11 rose 18% Y/Y to $0.70 (vs. implied guidance of $0.68-0.69 and
our/Street estimate of $0.70/0.72). Revenue rose 1.1% Q/Q to $1.602B ($25M
below our estimate) although volumes declined 1.4% Q/Q. Operating margin fell
110bp Y/Y to 29.0% (vs. our 29.6% estimate) while other income was $28M
above our estimate (equivalent to $0.04/sh).
n INFY's revenue guidance of 18%-20% growth implies continued share gains for
offshore services relative to flat to moderately expanding IT-budgets in FY12.
INFY expects a more "normal" spending environment in FY12, and expects to
modestly out-pace offshore industry growth.
n FY12 revenue outlook of 18-20% Y/Y growth to $7.13-$7.25B (vs. our/Street
prior estimate of 18%/22%); EPS guidance of 8%-10% growth to $2.83-2.88 (vs.
our/Street's prior $3.05/3.27) reflects ~300bp margin pressure—100 bps for FX,
100 bps for higher wages, and 120 bps for lower utilization.
n We reduce our FY12E EPS to $2.89 (from $3.05 vs. guidance of $2.83-2.88)
and introduce a FY13E EPS of $3.20 (+11% Y/Y). Our FY12E EPS assumes
18.5% revenue growth and 260bp of margin compression; for FY13 we estimate
16% revenue growth and 70bp of margin compression.
n Following today's ~14% sell-off, the shares trade at 22x and 20x our FY12E and
FY13E EPS. While we believe secular growth trends remain intact, industry
fundamentals remain solid, and that our estimates could prove conservative.
However, we are unclear regarding the longer-term trajectory of INFY's margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies Limited
INFY: Reducing Estimates Largely On Margin
Disappointment
SUMMARY
INFY's FY12 revenue guidance of 18-20% growth appears reasonable although
dependent on 2Q/3Q sequential acceleration. We expected some operating margin
degradation, but the severity implicit in guidance is disappointing and hard to
reconcile, absent incremental investments. Consistent with INFY's revenue
guidance, we remain optimistic about industry demand trends heading into FY12.
We also view INFY's margin/EPS guidance as largely company-specific and not
reflective of increased competition/pricing pressure. We reduce our FY12E EPS by
5% and introduce an FY13E EPS, which suggests 11% EPS growth and assumes
further modest margin degradation. This note supplements our earlier note today.
KEY POINTS
n EPS for 4Q11 rose 18% Y/Y to $0.70 (vs. implied guidance of $0.68-0.69 and
our/Street estimate of $0.70/0.72). Revenue rose 1.1% Q/Q to $1.602B ($25M
below our estimate) although volumes declined 1.4% Q/Q. Operating margin fell
110bp Y/Y to 29.0% (vs. our 29.6% estimate) while other income was $28M
above our estimate (equivalent to $0.04/sh).
n INFY's revenue guidance of 18%-20% growth implies continued share gains for
offshore services relative to flat to moderately expanding IT-budgets in FY12.
INFY expects a more "normal" spending environment in FY12, and expects to
modestly out-pace offshore industry growth.
n FY12 revenue outlook of 18-20% Y/Y growth to $7.13-$7.25B (vs. our/Street
prior estimate of 18%/22%); EPS guidance of 8%-10% growth to $2.83-2.88 (vs.
our/Street's prior $3.05/3.27) reflects ~300bp margin pressure—100 bps for FX,
100 bps for higher wages, and 120 bps for lower utilization.
n We reduce our FY12E EPS to $2.89 (from $3.05 vs. guidance of $2.83-2.88)
and introduce a FY13E EPS of $3.20 (+11% Y/Y). Our FY12E EPS assumes
18.5% revenue growth and 260bp of margin compression; for FY13 we estimate
16% revenue growth and 70bp of margin compression.
n Following today's ~14% sell-off, the shares trade at 22x and 20x our FY12E and
FY13E EPS. While we believe secular growth trends remain intact, industry
fundamentals remain solid, and that our estimates could prove conservative.
However, we are unclear regarding the longer-term trajectory of INFY's margins.
