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Infosys Technologies (INFO)
Technology
More thoughts on Infosys’ FY2012E guidance. Infosys’ strong 2HFY12E guidance,
despite the company’s own recent struggles and deteriorating macro newsflow, has
raised a few strong and perfectly valid questions. Even as we do not claim to have
convincing answers to these questions, we present our thoughts on (1) the revised
guidance, (2) our belief that a minor miss on the guidance may not matter, and (3) why
Infosys, despite the recent run-up, has not become a currency play yet. Reiterate BUY.
Skepticism on strong 2H guidance not unwarranted
How can a company that has underperformed competition and its own guidance (by its own lofty
standards) for the past four quarters, in a ‘deteriorating macro environment’, guide for an
acceleration in revenue/volume momentum in the second half of a fiscal year? A stronger 2H than
1H? A 5.5% revenue/volume CQGR in the seasonally weak December and March quarters? Really?
Are we looking at similar trends for the industry? Isn’t the implied strong March quarter when
clients’ IT budgets have the potential to throw in nasty surprises way too aggressive a guidance?
Each of the questions above is perfectly valid. Stronger 2H versus 1H has been a fairly rare
occurrence – it has happened just twice for Infosys in the past 14 years – one of those years was
FY2010, where the 2H acceleration could be explained by volume momentum build-up as the
world came out of the post-Lehman crisis; the other was FY2004, which can be seen as an
aberration. In addition, 5.6% qoq volume growth guidance implied for 4QFY12 over 3Q, if
delivered, would be the highest 4Q sequential volume growth since FY2006, when the company
revenues were less than one-third of the current base.
Add on top of these historical data points the fact that Infosys’ performance over the past few
quarters has been weak and does not inspire much confidence and you have all the ingredients of
some valid skepticism on 2H guidance. We too share some of the skepticism. Unfortunately, we
do not have a crystal ball (we have never had one). All we can do is share our view on what could
have prompted such guidance from Infosys, especially when they could have easily built in more
caution (and some welcome cushion) citing ‘macro challenges’ –
Strong contract wins which may ramp up in 3QFY12E and may spill over to 4QFY12E. Per our
channel checks and discussions with Infosys management at various points, the company has
had some strong deal wins over the past few quarters; ramp-ups have not been visible in
performance for the past four quarters. Some such deals may be entering the ramp-up phase.
We of course still are strong believers in Infosys’ account mining capabilities.
A weak 1H, setting a low base to work on for 2H growth.
A new normal where ‘within-range guidance delivery’ is acceptable.
Guidance as a tool for setting a high bar internally.
We would prefer erring on the side of belief than doubt, however
Any of the above-mentioned reasons behind the surprisingly positive/aggressive 2H guidance
is plausible; there could be alternate explanations as well, including the possibility of
the guidance actually reflecting the company’s view of its execution pipeline for the
next two quarters. Answers to whether the skepticism was valid or not would become
available in the 3Q earnings report at the earliest. Till then, our approach is to build some
caution (we build lower-than-upper-end-of-guidance 18.5% US$ revenue growth for
FY2012E) without casting serious doubts on the twin possibilities of
Offshore IT services demand not decelerating to the extent the Street believes it is –
essentially the macro newsflow versus micro indicators dichotomy that has been around
for some time now, and
Infosys’ weak performance over the past few quarters reflected just execution challenges
and not structural ones on the company’s competitive positioning in the market or its
ability to grow while sustaining premium pricing levels.
Aren’t valuations stretched, however? Hasn’t Infosys become a currency play
post the recent surge?
Valid questions again, both of these. Answer to both lies in the answer to a separate
question – can Infosys deliver an EPS of Rs160/share in FY2013E even at an
appreciated Re/US$ rate of let’s say 45 to a US Dollar? Our answer is ‘Yes, it can’ unless
macro developments bring client decision making to a halt (or slow it down considerably).
Whether Rupee will appreciate if such macro developments pan out is a separate question
altogether. Our current FY2013E estimate of Rs162/share at Re/US$ assumption of 45.6
amply reflects our confidence.
Our confidence stems from two factors, primarily –
We do not expect demand environment to deteriorate materially versus the reset
expectations. Fair amount of caution on volumes and pricing is already built into our
current assumptions.
Margin levers at Infosys’ disposal – we highlight the key ones in the form of utilization,
and employee pyramid. Infosys has also made substantial investments in ramping up its
consulting and package implementation resource pool onsite in recent quarters (Exhibit 3
depicts the movement in the company’s onsite wage capita cost over quarters). We also
highlight that margins (of the industry in general, not just Infosys) will likely find support
from lower attrition and reduced wage pressure should demand environment turn out to
be meaningfully worse versus expectations – a good natural hedge of sorts, unless weak
revenue growth is a result of some serious pricing decline in the market (we do not see
such a possibility).
We remain constructive on Infosys and reiterate our BUY rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Infosys Technologies (INFO)
Technology
More thoughts on Infosys’ FY2012E guidance. Infosys’ strong 2HFY12E guidance,
despite the company’s own recent struggles and deteriorating macro newsflow, has
raised a few strong and perfectly valid questions. Even as we do not claim to have
convincing answers to these questions, we present our thoughts on (1) the revised
guidance, (2) our belief that a minor miss on the guidance may not matter, and (3) why
Infosys, despite the recent run-up, has not become a currency play yet. Reiterate BUY.
Skepticism on strong 2H guidance not unwarranted
How can a company that has underperformed competition and its own guidance (by its own lofty
standards) for the past four quarters, in a ‘deteriorating macro environment’, guide for an
acceleration in revenue/volume momentum in the second half of a fiscal year? A stronger 2H than
1H? A 5.5% revenue/volume CQGR in the seasonally weak December and March quarters? Really?
Are we looking at similar trends for the industry? Isn’t the implied strong March quarter when
clients’ IT budgets have the potential to throw in nasty surprises way too aggressive a guidance?
Each of the questions above is perfectly valid. Stronger 2H versus 1H has been a fairly rare
occurrence – it has happened just twice for Infosys in the past 14 years – one of those years was
FY2010, where the 2H acceleration could be explained by volume momentum build-up as the
world came out of the post-Lehman crisis; the other was FY2004, which can be seen as an
aberration. In addition, 5.6% qoq volume growth guidance implied for 4QFY12 over 3Q, if
delivered, would be the highest 4Q sequential volume growth since FY2006, when the company
revenues were less than one-third of the current base.
Add on top of these historical data points the fact that Infosys’ performance over the past few
quarters has been weak and does not inspire much confidence and you have all the ingredients of
some valid skepticism on 2H guidance. We too share some of the skepticism. Unfortunately, we
do not have a crystal ball (we have never had one). All we can do is share our view on what could
have prompted such guidance from Infosys, especially when they could have easily built in more
caution (and some welcome cushion) citing ‘macro challenges’ –
Strong contract wins which may ramp up in 3QFY12E and may spill over to 4QFY12E. Per our
channel checks and discussions with Infosys management at various points, the company has
had some strong deal wins over the past few quarters; ramp-ups have not been visible in
performance for the past four quarters. Some such deals may be entering the ramp-up phase.
We of course still are strong believers in Infosys’ account mining capabilities.
A weak 1H, setting a low base to work on for 2H growth.
A new normal where ‘within-range guidance delivery’ is acceptable.
Guidance as a tool for setting a high bar internally.
We would prefer erring on the side of belief than doubt, however
Any of the above-mentioned reasons behind the surprisingly positive/aggressive 2H guidance
is plausible; there could be alternate explanations as well, including the possibility of
the guidance actually reflecting the company’s view of its execution pipeline for the
next two quarters. Answers to whether the skepticism was valid or not would become
available in the 3Q earnings report at the earliest. Till then, our approach is to build some
caution (we build lower-than-upper-end-of-guidance 18.5% US$ revenue growth for
FY2012E) without casting serious doubts on the twin possibilities of
Offshore IT services demand not decelerating to the extent the Street believes it is –
essentially the macro newsflow versus micro indicators dichotomy that has been around
for some time now, and
Infosys’ weak performance over the past few quarters reflected just execution challenges
and not structural ones on the company’s competitive positioning in the market or its
ability to grow while sustaining premium pricing levels.
Aren’t valuations stretched, however? Hasn’t Infosys become a currency play
post the recent surge?
Valid questions again, both of these. Answer to both lies in the answer to a separate
question – can Infosys deliver an EPS of Rs160/share in FY2013E even at an
appreciated Re/US$ rate of let’s say 45 to a US Dollar? Our answer is ‘Yes, it can’ unless
macro developments bring client decision making to a halt (or slow it down considerably).
Whether Rupee will appreciate if such macro developments pan out is a separate question
altogether. Our current FY2013E estimate of Rs162/share at Re/US$ assumption of 45.6
amply reflects our confidence.
Our confidence stems from two factors, primarily –
We do not expect demand environment to deteriorate materially versus the reset
expectations. Fair amount of caution on volumes and pricing is already built into our
current assumptions.
Margin levers at Infosys’ disposal – we highlight the key ones in the form of utilization,
and employee pyramid. Infosys has also made substantial investments in ramping up its
consulting and package implementation resource pool onsite in recent quarters (Exhibit 3
depicts the movement in the company’s onsite wage capita cost over quarters). We also
highlight that margins (of the industry in general, not just Infosys) will likely find support
from lower attrition and reduced wage pressure should demand environment turn out to
be meaningfully worse versus expectations – a good natural hedge of sorts, unless weak
revenue growth is a result of some serious pricing decline in the market (we do not see
such a possibility).
We remain constructive on Infosys and reiterate our BUY rating.
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