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Good headline numbers, internals even better. Infosys reported robust revenue
growth, EBIT margin expansion (helped by write-back of doubtful debts) and 5% net
income beat. Internals were healthy with nice increase in number of clients across various
buckets, 350 bps decline in attrition, continued investments in S&M and solid growth in
underpenetrated IMS. Results and lead indicators lend confidence on sustenance of overall
performance. Valuations at ~16X FY2016E earnings are inexpensive in light of increasing
comfort on execution of turnaround initiatives. Retain ADD with unchanged TP of `2,350
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Good headline numbers; EBIT margin improvement optical in nature
Infosys reported constant currency (c/c) revenue growth rate of 2.6% qoq, in line with our
estimate. Growth was solid across verticals (except retail and utilities) and geographies. Volume
growth of 4.2% was strong in a seasonally weak quarter though this came with 0.8%/2.4%
onsite/offshore price decline; aggression in new deals and growth from low-realization services
of application management and IMS are partly to blame. EBIT margin increased 60 bps to
26.7%. Benefits of rupee depreciation was offset by pricing decline. Entire margin swing can be
attributed to write-back of doubtful debtors provision (70 bps gain from swing). Net income of
`32.5 bn was 5% higher than our estimate due to mix of margin beat and higher-thanexpected
other income. FCF generation was robust at 96% of net income.
Internals were even better; attrition decline, increase in client buckets, continued S&M spend
Overall quality of results is comforting – (1) progression of clients across various buckets is
impressive (# of US$100 mn and 200 mn accounts increased by 1; US$75 mn increased by 2).
Measures of sales effectiveness are showing early signs of delivery, (2) S&M expenses remain
elevated; S&M was 5.6%for the quarter. Margin increase is not at the expense of S&M
investments, (3) quarterly annualized attrition rate declined to 21.3% from 24.8% in 2QFY15.
Management has made a number of interventions, including increase in compensation and
promotions. Attrition will trend down further in our view in subsequent quarters, and (4) infra
management, a fast-growing segment for the industry, grew 4.6% in USD terms.
Growth will keep on improving, valuations are inexpensive. ADD
Key initiatives in the past 18 months are showing up in headline numbers and lead indicators and
give us comfort on overall execution. Factors helping growth are flexibility in pricing decisions (as
long as it stays in the broad organizational framework) and deal structures, investments in the
back-end and adding more feet on the ground (sales and marketing). Infosys still has gaps in its
portfolio, especially in IMS and BPO, and will need more time for convergence of growth with
fast-growing peers. However, the important aspect is that the company is on the right track to
reach its articulated revenue targets. We incorporate further impact of currency movement and
cut US$ revenue forecast but broadly retain our earnings estimates and TP of `2,350.
Continuing weakness in EUR, GBP and AUD impacts our FY2015-17E US$ revenue growth.
The compensatory benefit is rupee depreciation, which will offset the USD revenue growth
headwinds. We cut FY2015-17E USD revenue growth by 0.6-1.3%. Our constant-currency
revenue growth estimates remain unchanged.
Management commentary on demand trends mixed
Exhibit 1 summarizes management’s commentary on demand. The management
commentary on 2015 IT budgets was broadly in line with our expectations—overall flattish
IT spends across most verticals. The management didn’t indicate any delays in closure of IT
budgets, a positive.
In 2014, demand strengthened in select areas and weakened in some—we expect 2015 to
be no different. Positives are (1) an improving economic scenario in the US, (2) expected
recovery in IT spending in the banking vertical after the past two years were impacted by
regulatory fines in the US; we understand not all the fines were funded by the corporate
center and (3) large deals and continued market-share gains. Negatives are (1) the impact of
the decline in oil prices on energy and utilities verticals, which will impact select segments of
manufacturing and (2) volatile demand in emerging markets. On the whole, we believe
demand will be similar to that in 2014, if not better. Funding of digital initiatives by clients
through incremental spending rather than through self-funding mechanisms (aggressive cost
take-outs in the legacy business) can be an additional growth driver.
Exhibit 1: Management commentary on demand outlook for CY2015
Source: Company, Kotak Institutional Equities
TCV weak but is of little utility in forecasting growth
Infosys announced three large deals aggregating to US$213 mn (as against US$600 mn in
2Q) across the US, Europe and the Rest of the World. While this data is useful in assessing
the trend in large deal wins, especially progress in IMS, this has little utility in forecasting
growth or for peer comparison. Infosys does not include deals below US$50 mn (the
company indicated that it has won several such deals in 3QFY15), deals in consulting and
package implementation and number of other segments. These segments have large
contracts but not necessarily signed on the dotted line, which prevents Infosys from
reporting in TCV. Further, Infosys’ deals do not have any hardware component built in,
something which cannot be said about the competition. We believe that Infosys should
either offer estimate value of contracts, i.e. overall booking (similar to Accenture reporting),
or stop reporting large deal TCVs.
Vertical % of revenues Commentary
Banking and Financial services 26.8
US Banks - IT budgets could be flat to marginally down
European Banks - IT budgets expected to grow
Regulatory pressures keeping overall spending intact.
Insurance 6.3 Infosys' deal pipeline has improved; expect low single digit growth
Manufacturing 23.4 Auto and Hi-tech doing well - modest increase in budgets
Seeing some challenges in Industrials and Aerospace clients
Retail 14.9 Trends - long decision cycles; IT projects driven by consolidation, shared services and cost takeouts.
IT budgets for 2015 are yet to be finalized.
Telecom 8.7 Sector is struggling but M&A activity presents growth opportunities
Energy and Utilities 4.9 Severe cost pressures on client to due to drop in oil prices; IT budgets would decline across US and Europe
Large deal pipeline is helping Infosys and several new outsourcing opportunities have emerged
Life sciences and healthcare 7.1 Overall pipeline has improved in past 12 months. Expect better growth from US than Europe. 2015 IT budgets
not finalized but likely to be tight
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily12012015az.pdf
Good headline numbers, internals even better. Infosys reported robust revenue
growth, EBIT margin expansion (helped by write-back of doubtful debts) and 5% net
income beat. Internals were healthy with nice increase in number of clients across various
buckets, 350 bps decline in attrition, continued investments in S&M and solid growth in
underpenetrated IMS. Results and lead indicators lend confidence on sustenance of overall
performance. Valuations at ~16X FY2016E earnings are inexpensive in light of increasing
comfort on execution of turnaround initiatives. Retain ADD with unchanged TP of `2,350
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
Good headline numbers; EBIT margin improvement optical in nature
Infosys reported constant currency (c/c) revenue growth rate of 2.6% qoq, in line with our
estimate. Growth was solid across verticals (except retail and utilities) and geographies. Volume
growth of 4.2% was strong in a seasonally weak quarter though this came with 0.8%/2.4%
onsite/offshore price decline; aggression in new deals and growth from low-realization services
of application management and IMS are partly to blame. EBIT margin increased 60 bps to
26.7%. Benefits of rupee depreciation was offset by pricing decline. Entire margin swing can be
attributed to write-back of doubtful debtors provision (70 bps gain from swing). Net income of
`32.5 bn was 5% higher than our estimate due to mix of margin beat and higher-thanexpected
other income. FCF generation was robust at 96% of net income.
Internals were even better; attrition decline, increase in client buckets, continued S&M spend
Overall quality of results is comforting – (1) progression of clients across various buckets is
impressive (# of US$100 mn and 200 mn accounts increased by 1; US$75 mn increased by 2).
Measures of sales effectiveness are showing early signs of delivery, (2) S&M expenses remain
elevated; S&M was 5.6%for the quarter. Margin increase is not at the expense of S&M
investments, (3) quarterly annualized attrition rate declined to 21.3% from 24.8% in 2QFY15.
Management has made a number of interventions, including increase in compensation and
promotions. Attrition will trend down further in our view in subsequent quarters, and (4) infra
management, a fast-growing segment for the industry, grew 4.6% in USD terms.
Growth will keep on improving, valuations are inexpensive. ADD
Key initiatives in the past 18 months are showing up in headline numbers and lead indicators and
give us comfort on overall execution. Factors helping growth are flexibility in pricing decisions (as
long as it stays in the broad organizational framework) and deal structures, investments in the
back-end and adding more feet on the ground (sales and marketing). Infosys still has gaps in its
portfolio, especially in IMS and BPO, and will need more time for convergence of growth with
fast-growing peers. However, the important aspect is that the company is on the right track to
reach its articulated revenue targets. We incorporate further impact of currency movement and
cut US$ revenue forecast but broadly retain our earnings estimates and TP of `2,350.
Continuing weakness in EUR, GBP and AUD impacts our FY2015-17E US$ revenue growth.
The compensatory benefit is rupee depreciation, which will offset the USD revenue growth
headwinds. We cut FY2015-17E USD revenue growth by 0.6-1.3%. Our constant-currency
revenue growth estimates remain unchanged.
Management commentary on demand trends mixed
Exhibit 1 summarizes management’s commentary on demand. The management
commentary on 2015 IT budgets was broadly in line with our expectations—overall flattish
IT spends across most verticals. The management didn’t indicate any delays in closure of IT
budgets, a positive.
In 2014, demand strengthened in select areas and weakened in some—we expect 2015 to
be no different. Positives are (1) an improving economic scenario in the US, (2) expected
recovery in IT spending in the banking vertical after the past two years were impacted by
regulatory fines in the US; we understand not all the fines were funded by the corporate
center and (3) large deals and continued market-share gains. Negatives are (1) the impact of
the decline in oil prices on energy and utilities verticals, which will impact select segments of
manufacturing and (2) volatile demand in emerging markets. On the whole, we believe
demand will be similar to that in 2014, if not better. Funding of digital initiatives by clients
through incremental spending rather than through self-funding mechanisms (aggressive cost
take-outs in the legacy business) can be an additional growth driver.
Exhibit 1: Management commentary on demand outlook for CY2015
Source: Company, Kotak Institutional Equities
TCV weak but is of little utility in forecasting growth
Infosys announced three large deals aggregating to US$213 mn (as against US$600 mn in
2Q) across the US, Europe and the Rest of the World. While this data is useful in assessing
the trend in large deal wins, especially progress in IMS, this has little utility in forecasting
growth or for peer comparison. Infosys does not include deals below US$50 mn (the
company indicated that it has won several such deals in 3QFY15), deals in consulting and
package implementation and number of other segments. These segments have large
contracts but not necessarily signed on the dotted line, which prevents Infosys from
reporting in TCV. Further, Infosys’ deals do not have any hardware component built in,
something which cannot be said about the competition. We believe that Infosys should
either offer estimate value of contracts, i.e. overall booking (similar to Accenture reporting),
or stop reporting large deal TCVs.
Vertical % of revenues Commentary
Banking and Financial services 26.8
US Banks - IT budgets could be flat to marginally down
European Banks - IT budgets expected to grow
Regulatory pressures keeping overall spending intact.
Insurance 6.3 Infosys' deal pipeline has improved; expect low single digit growth
Manufacturing 23.4 Auto and Hi-tech doing well - modest increase in budgets
Seeing some challenges in Industrials and Aerospace clients
Retail 14.9 Trends - long decision cycles; IT projects driven by consolidation, shared services and cost takeouts.
IT budgets for 2015 are yet to be finalized.
Telecom 8.7 Sector is struggling but M&A activity presents growth opportunities
Energy and Utilities 4.9 Severe cost pressures on client to due to drop in oil prices; IT budgets would decline across US and Europe
Large deal pipeline is helping Infosys and several new outsourcing opportunities have emerged
Life sciences and healthcare 7.1 Overall pipeline has improved in past 12 months. Expect better growth from US than Europe. 2015 IT budgets
not finalized but likely to be tight
LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily12012015az.pdf
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