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Demand environment remains unchanged since 1QFY12 results; but
weakness in coming quarters cannot be ruled out. Management
suggested that they have not seen any incremental change (deterioration) in
the demand environment since the 1QFY12 earnings call (including from
S&P downgrade of the US sovereign rating). Customers continue to be
cautious and are comfortable taking only short-term decisions. They remain
reluctant to award long-term sizable contracts. There is conservatism in
spending. However, the company is not seeing any project cancellations yet
and there is no dipping in activity level in the past month. Management
asserted that there are no discussions with clients to reduce pricing.
Interestingly, some of the clients are asking for work to be shifted offshore
to reduce costs further. Overall, though clients remain cautious, recent
events in the macro environment have not yet impacted the demand
environment. However, the impact comes with lag and we would be
cautiously looking for further commentary from companies in the coming
weeks.
FY12 guidance maintained for now assuming clients spend budgets.
Management reiterated its guidance for 18-20% US$ revenue growth in
FY12. However, this is incidental on clients releasing their budgets as
planned. In the event of clients withholding their budgets, the company
might consider revising its guidance downwards. The risk to guidance is
even more due to the back-end loaded growth expectations built in to the
guidance. The impact of weakening macro may make it difficult to achieve
the high growth rates expected in 2HFY12.
Too early to see the impact of Infosys 3.0. The company has completed the
restructuring of the organization. However, it is too early to see significant
results on the ground yet. We believe Infosys has addressed some of the
concerns we had earlier and our channel checks suggest somewhat increased
activity from Infosys on the sales front. Management pointed out that due to
full verticalization, the company is able to provide an integrated suite of
services, which has helped its deal-winning prospects. However, the positive
impacts from re-organization might be dampened due to the weak macro
environment.
Investment view. We retain our year-long Neutral rating; though we are
slightly more constructive now on Infosys than we have been in the past.
Whichever way we cut our analysis, we find it difficult to paint a scenario in
which Infosys grows in FY13 at a single-digit rate (in % terms). A 10%
revenue growth in FY13E would require four successive quarters of very
slow sequential growth starting Sep-Dec11, which is a fairly conservative
assumption as a slowdown of this duration was not seen even in 2008-09.
We believe that Infosys stock could rebound ~15-20% from here over the
next 9-12 months. Our reverse DCF framework, which is applicable across
cycles, also bears this out.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Demand environment remains unchanged since 1QFY12 results; but
weakness in coming quarters cannot be ruled out. Management
suggested that they have not seen any incremental change (deterioration) in
the demand environment since the 1QFY12 earnings call (including from
S&P downgrade of the US sovereign rating). Customers continue to be
cautious and are comfortable taking only short-term decisions. They remain
reluctant to award long-term sizable contracts. There is conservatism in
spending. However, the company is not seeing any project cancellations yet
and there is no dipping in activity level in the past month. Management
asserted that there are no discussions with clients to reduce pricing.
Interestingly, some of the clients are asking for work to be shifted offshore
to reduce costs further. Overall, though clients remain cautious, recent
events in the macro environment have not yet impacted the demand
environment. However, the impact comes with lag and we would be
cautiously looking for further commentary from companies in the coming
weeks.
FY12 guidance maintained for now assuming clients spend budgets.
Management reiterated its guidance for 18-20% US$ revenue growth in
FY12. However, this is incidental on clients releasing their budgets as
planned. In the event of clients withholding their budgets, the company
might consider revising its guidance downwards. The risk to guidance is
even more due to the back-end loaded growth expectations built in to the
guidance. The impact of weakening macro may make it difficult to achieve
the high growth rates expected in 2HFY12.
Too early to see the impact of Infosys 3.0. The company has completed the
restructuring of the organization. However, it is too early to see significant
results on the ground yet. We believe Infosys has addressed some of the
concerns we had earlier and our channel checks suggest somewhat increased
activity from Infosys on the sales front. Management pointed out that due to
full verticalization, the company is able to provide an integrated suite of
services, which has helped its deal-winning prospects. However, the positive
impacts from re-organization might be dampened due to the weak macro
environment.
Investment view. We retain our year-long Neutral rating; though we are
slightly more constructive now on Infosys than we have been in the past.
Whichever way we cut our analysis, we find it difficult to paint a scenario in
which Infosys grows in FY13 at a single-digit rate (in % terms). A 10%
revenue growth in FY13E would require four successive quarters of very
slow sequential growth starting Sep-Dec11, which is a fairly conservative
assumption as a slowdown of this duration was not seen even in 2008-09.
We believe that Infosys stock could rebound ~15-20% from here over the
next 9-12 months. Our reverse DCF framework, which is applicable across
cycles, also bears this out.
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