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We view the 330bp yoy guided FY12 margin drop more
as the management’s typical cautious stance at a fiscal
start, especially given the recent INR strength.
An uptrend in realization and better revenue growth
could restrict margin drop to ~150bp, in our view. Nearterm, a potential INR weakness could be the joker.
Note, the demand outlook stays robust; we see drivers
for Infosys to meet our 25% US$ revenue forecasts.
After a 10% post-results correction, we remain at O/P.
However, we expect the stock to remain ranged nearterm; a break-out will await 1QFY12 results.
4Q11: Volume de-growth was a surprise. Consolidated
revenue grew 1.1% qoq to US$1.6bn, below our estimates,
as volumes declined 1.4% qoq, even as realization pulled
up 2.5% (+2.1% in cc terms). EBITDA margin was thus
down 123bp (we expected -7bp), utilization fell -5.3% qoq
and a spike in per-capita onsite wage costs (+7.7%qoq).
PAT of Rs18.2bn was 2.6% below our forecast.
FY12 margin outlook – Typical ‘Infosys’ conservatism’?
The 330bp yoy guided FY12 margin decline disappointed.
However, we see it as typical of the management’s cautious
stance – recall FY10 (actual EBIT margin +93bp yoy versus
guided -300bp) and FY11 (-113bp versus -150bp). We
believe the FY12 fall could be restricted to ~150bp given the
uptrend in realization and a higher revenue growth.
Underlying revenue drivers remain strong. 45,000 gross
headcount guidance at current 67% utilization level suggest
strong deal momentum (at-least 12 US$50m+ deals in
pipeline), in our view. Also, client engagements continue to
grow (US$20m+ revenue accounts are now 12% of base). A
late cycle recovery in telecom vertical by 2HY12 is the joker.
However, EPS estimates will likely see a reset. We cut
our FY12 EPS by 5% and expect consensus to follow given
the wide 15% gap versus the guidance. Management’s
unclear commentary around 4Q performance/FY12 margin
could also keep the stock’s valuation subdued, especially if
peers come up with better quarterly results.
But 10% correction post result captures much of the
downside, in our view. We stay at O/P though near-term,
the stock may remain ranged pending a potential upgrade to
margin outlook post 1QFY12 results.
OUTPERFORM maintained
We believe Infosys is on track to achieve a 25% growth in FY12 in light of the 18-20% initial
US$ revenue growth guidance as well as management’s commentary on healthy demand
environment. However, we cut our FY12/13 US$ EPS forecasts by 4-5%, factoring in lower
utilization as well as onsite shift, in-line with management comments. We retain our
OUTPERFORM recommendation and price target of Rs3,610.
We expect Infosys to sustain a 25% FY11-14 US$ revenue CAGR forecasts on the back of a
20.4% volume CAGR and 3.8% blended realization CAGR. We have made changes to our
utilization and effort mix assumptions, incorporating the management’s FY12 operational outlook.
The lower operating margins as well as higher tax rate assumptions result in a 5%/4% decline in
our FY12/13 EPS assumptions.
Risks to our estimates and price target
Key downside risks to our price target are: 1) rupee appreciation beyond the levels we assume
and/or adverse cross-currency movements; 2) a slower than anticipated pricing recovery; 3)
delays in the implementation of direct tax code beyond FY12; and 4) strong regulatory action
against outsourcing in Infosys’s key geographic markets.
Upside could come from: 1) rupee appreciation slower than the level we assume; 2) faster-thananticipated recovery in project awards/ramp-ups; large-deal wins ahead of numbers or contract
value factored into our estimates; and 3) acquisitions/large deal wins not built into our model.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We view the 330bp yoy guided FY12 margin drop more
as the management’s typical cautious stance at a fiscal
start, especially given the recent INR strength.
An uptrend in realization and better revenue growth
could restrict margin drop to ~150bp, in our view. Nearterm, a potential INR weakness could be the joker.
Note, the demand outlook stays robust; we see drivers
for Infosys to meet our 25% US$ revenue forecasts.
After a 10% post-results correction, we remain at O/P.
However, we expect the stock to remain ranged nearterm; a break-out will await 1QFY12 results.
4Q11: Volume de-growth was a surprise. Consolidated
revenue grew 1.1% qoq to US$1.6bn, below our estimates,
as volumes declined 1.4% qoq, even as realization pulled
up 2.5% (+2.1% in cc terms). EBITDA margin was thus
down 123bp (we expected -7bp), utilization fell -5.3% qoq
and a spike in per-capita onsite wage costs (+7.7%qoq).
PAT of Rs18.2bn was 2.6% below our forecast.
FY12 margin outlook – Typical ‘Infosys’ conservatism’?
The 330bp yoy guided FY12 margin decline disappointed.
However, we see it as typical of the management’s cautious
stance – recall FY10 (actual EBIT margin +93bp yoy versus
guided -300bp) and FY11 (-113bp versus -150bp). We
believe the FY12 fall could be restricted to ~150bp given the
uptrend in realization and a higher revenue growth.
Underlying revenue drivers remain strong. 45,000 gross
headcount guidance at current 67% utilization level suggest
strong deal momentum (at-least 12 US$50m+ deals in
pipeline), in our view. Also, client engagements continue to
grow (US$20m+ revenue accounts are now 12% of base). A
late cycle recovery in telecom vertical by 2HY12 is the joker.
However, EPS estimates will likely see a reset. We cut
our FY12 EPS by 5% and expect consensus to follow given
the wide 15% gap versus the guidance. Management’s
unclear commentary around 4Q performance/FY12 margin
could also keep the stock’s valuation subdued, especially if
peers come up with better quarterly results.
But 10% correction post result captures much of the
downside, in our view. We stay at O/P though near-term,
the stock may remain ranged pending a potential upgrade to
margin outlook post 1QFY12 results.
OUTPERFORM maintained
We believe Infosys is on track to achieve a 25% growth in FY12 in light of the 18-20% initial
US$ revenue growth guidance as well as management’s commentary on healthy demand
environment. However, we cut our FY12/13 US$ EPS forecasts by 4-5%, factoring in lower
utilization as well as onsite shift, in-line with management comments. We retain our
OUTPERFORM recommendation and price target of Rs3,610.
We expect Infosys to sustain a 25% FY11-14 US$ revenue CAGR forecasts on the back of a
20.4% volume CAGR and 3.8% blended realization CAGR. We have made changes to our
utilization and effort mix assumptions, incorporating the management’s FY12 operational outlook.
The lower operating margins as well as higher tax rate assumptions result in a 5%/4% decline in
our FY12/13 EPS assumptions.
Risks to our estimates and price target
Key downside risks to our price target are: 1) rupee appreciation beyond the levels we assume
and/or adverse cross-currency movements; 2) a slower than anticipated pricing recovery; 3)
delays in the implementation of direct tax code beyond FY12; and 4) strong regulatory action
against outsourcing in Infosys’s key geographic markets.
Upside could come from: 1) rupee appreciation slower than the level we assume; 2) faster-thananticipated recovery in project awards/ramp-ups; large-deal wins ahead of numbers or contract
value factored into our estimates; and 3) acquisitions/large deal wins not built into our model.
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