Société Générale - Asian capital market Outlook

Société Générale - Asian capital market Outlook

The Ice Age only ends when the market loses hope: there is still too much hope: societe generale

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Plus ça change! The new year starts with yet another equity rally. Another burst of hope. To
me this feels no different from the start of 2011 but with one major difference. Profits are
sliding instead of rising robustly. In the UK there are calls to cut company taxes to help revive
the economy. I may not have a remedy for the current post-bubble malaise, but I do know a
bloody stupid idea when I hear one.
 One key lesson from Japan is that an essential ingredient to the end of a long valuation
bear market is revulsion. It is when ‘buyers-on-dips’ become ‘sellers-on-rallies’. It is when
volume dries up to almost nothing. It is the loss of hope. In Japan we saw huge rallies in the
Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new
lows in the equity market saw hope being progressively crushed. Previous US valuation
bear markets typically take 4 or 5 recessions to fully play out. We have only had two.
 The market is once again in a hope phase – hoping that the US is now in a self-sustaining
recovery; hoping that China might be soft-landing; hoping that the Greece bailout and the
ECB liquidity polices have settled things down in the eurozone. These bursts of hope are
essential in long bear markets. Essential in the sense that hope must be crushed. It will be
crushed. Hope still beats in the breasts of equity investors. The market will rip out that hope
and consume it in front of investors’ eyes. Only then can the bull market begin.
 Talking about pain, having previously shared my experience of an anaesthetic-free
vasectomy, I feel I know what sudden unexpected pain is - link. Standing outside Daphne’s
on my recent sun-seeking hols enjoying my happy-hour rum punch, this plucky crab
proceeded to attempt to remove one of my toes. It hurt far more than I expected but
provided much amusement for my wife. Upon finding he was not large enough to remove
my toe he scuttled under the decking to get his bigger mates out to help him. Cue my exit.

Sell INFOSYS Expect FQY12 guidance to be lowered on macro risks: Societe Generale,

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INFOSYS
Expect FY12 guidance to be lowered on macro risks. Sell maintained


 Update We believe Infosys will probably lower its FY12 guidance when it reports Q2 2012
earnings (to end-September) on 12 October. For Q2, we expect revenue of $1,720m and
EPS at $0.66 vs the consensus of $1,637m and $0.67 respectively. Our negative stance
stems from several factors: 1/ increased pressure in the financial services sector (35% of
group revenue) due to growing macroeconomic uncertainty over the past three months,
affecting several investment banks in the short-term (such as UBS, Bank of America,
Goldman Sachs) which are planning important restructuring measures. Our industry contacts
mentioned lower volume growth as well as a slight decline in pricing in constant currency.
We expect this situation to last about six months before any stabilisation; 2/ tough comps in
Europe (21% of group revenue) with Q2 2011 up 22% yoy. We note that Infosys also
reported a 3% decline sequentially at constant currency in the past quarter;  3/ probable
pricing pressure going forward as most indicators point to a worsening environment ahead,
negatively impacting IT demand (no budget flush likely in Q4 11 and reduced growth
prospects for 2012); and  4/ ongoing reorganisation.  Upside risks include:  1/ intact
structural demand if clients continue the offshore trend and favour tier-1 Indian vendors like
Infosys and 2/ depreciation of the Indian rupee vs the US dollar would help EPS as 1%
depreciation has a positive 40bp impact on operating margin.
 Impact For FY12 (to end-March), we expect revenue of $6.8bn (+13% yoy vs guidance
for +18-20% yoy to $7.13-7.25bn and the consensus of $6.61bn) and EPS unchanged at
$2.77 (vs guidance of $2.88-2.92 and the consensus at $2.77).
 Target price & rating Although the share price is down 34% YTD, we believe that there are still
important downside risks. Consequently, we maintain our Sell rating with a TP of $43 based on
a mix of multiples (12m forward EV/Sales, EV/EBIT) and DCF, specifically 2.6x 12m forward
EV/Sales (historical trough), 8x 12m forward EV/EBIT and DCF (WACC 10.3%, long-term
margin 26%, terminal growth 2.5%).  Risks: currency swings (INR vs USD, EUR and GBP),
ongoing reorganisation, potential acquisitions.
 Next events & catalysts Infosys has scheduled a conference call for Q2 2012 (to endSeptember) on 12 October at 10:30am CET (2:00 pm IST). Dial-in: UK +44 0808 101 1573

INFOSYS TECHNOLOGIES LIMITED Uncertain margin prospects increase short-term pressure. Sell ::Societe Generale

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INFOSYS TECHNOLOGIES LIMITED
Uncertain margin prospects increase short-term pressure. Sell maintained


 Update Following disappointing FY11 results (to end-March) and poor FY12 guidance
reported on 15 April, we reduce our FY12 EPS to $2.88 (from $3.06). We maintain our
Sell rating (new TP $56, from $58) on Infosys. While we believe market demand remains
solid (for FY12, Nasscom revenue estimates: +16-17% for Indian providers, SGe +18%
for Infosys), we remain cautious on Infosys’s margin prospects for two reasons: 1/ Poor
execution in Q4 FY11 potentially spreading into FY12. Despite a strong demand
environment (pricing +2% for a third quarter in a row), Infosys reported a 2% volume
decline in Q4, indicating poor execution in our view; a large decline in utilisation rate
(FY12e: -120bp) due to aggressive hiring (FY12 target: 45k gross hiring); a sharp
increase in unbilled revenue ($92m at end-March) and stable DSO (63 days) at a high
level; 2/ Potential additional investments to regain market share from offshore peers
(TCS, Cognizant): reorganisation (alongside industry lines across all geographies,
creation of a new vertical – public services and healthcare); investment in Europe (23%
group revenue) by hiring more local resources; consolidation of services offering; buildup
of the global delivery platform outside India (e.g. China, Mexico, Brazil) and wage
hikes (2-3% onsite and 10-12% offshore, effective 1 April). Infosys needs to regain
momentum in the insurance and telecoms sectors, where it has been struggling over the
last four quarters.

Societe Generale : Infosys's strong results support our thesis of a solid Q4 in Europe for the sector

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Software
Infosys's strong results support our thesis of a solid Q4 in Europe for the sector 
 Infosys (Sell) Q3 FY11 (to end-Dec) Infosys reported revenue of $1.6bn (+29% y/y).
Momentum was sustained in the US (66% group sales, revenue +25% Q3 11 vs Q4 FY10
+18%, Q1 FY11 +26, Q2 +29%) while Europe accelerated with revenue up 29% y/y (Q1 0%,
Q2 +22%). But note that Infosys has only marginal exposure to Southern Europe and the
Public Sector. Financial Services maintained impressive growth with revenue up 35% (Q4
FY10 +22%, Q1 FY11 +15%, Q2 +37%). Manufacturing also showed acceleration (Q4 FY10
+12%, Q1 FY11 +15%, Q2 +27%, Q3 +31%).