Infosys Ltd (Q4 FY12)

• Dollar revenues below estimates; Pricing declines 1.3% sequentially
• Few verticals/services show growth; Developed markets’ growth weakens
• Decent operating margin performance despite strong headwinds
• FY13/Q1 FY13 dollar revenue guidance disappoints; Wage hikes decision deferred   
• Reduce FY13E/FY14E earnings estimates by 5%/6%; Decrease the TP and rate the stock as  MP

Result table

Dollar revenues below estimates; Pricing declines 1.3% sequentially

Infosys delivered a weak dollar revenue performance in Q4 FY12 with dollar revenues de-growing 2% qoq (~2.7% ex-cross currency tailwind). Volumes fell 1.5% sequentially on the back of marked slowdown in business especially in US/BFSI segment. Delay in contract closures as well as certain ramp downs led to a sharper volume correction onsite (2.1% qoq). Pricing too corrected 1.3% qoq in constant currency terms. Rupee revenues correction of 4.8% sequentially was accentuated by rupee appreciation (1.3% qoq) during the quarter. On a positive note, client addition remained strong at 52 of which twelve were F-500 clients. There were three large deals (US$100mn+) and seven transformational deal signed during the quarter. Products & Platform signings (non-linear revenues) improved to US$350mn of TCV during the last quarter.

Few verticals/services show growth; Developed markets’ growth weakens
Only a handful of verticals/services lines grew meaningfully during Q4 FY12. Amongst verticals, manufacturing continued its decent growth trajectory posting 2.4% qoq growth in dollar revenues followed by Retail which grew 1.9% qoq in dollar terms. Among major verticals, BFSI performance was a major dampener de-growing 4.8% sequentially on the back of delayed contract closures, slower ramp ups and unanticipated ramp downs. Within service lines, BPO (including BPM platform) grew 17% qoq followed by Consulting& Package implementation which was flat (versus 2% qoq de-growth at company level). On the geography front, NA de-grew 3.9% qoq and Europe remained flat. On the flip side, RoW showed a decent growth of 5.2% sequentially. Macroeconomic concerns continued to bear the brunt on client spending/decision making for developed markets especially the Eurozone. Leadership changes in certain clients as well as extended deadlines with respect to regulatory compliance also had an external impact on the performance.

Decent operating margin performance despite strong headwinds; Employee additions remain strong
Operating margin performance for Q4 FY12 was pleasantly better than expected. OPM fell by 108 bps qoq vis-à-vis expectation of correction by 126bps. This is especially good in light of the strong headwinds faced by the company during the quarter. These were,1) the weaker than expected volume performance and strong hiring induced correction in utilization (down ~600bps qoq) and 2) material correction in pricing (1.3% versus expectation of flat pricing). These headwinds were likely offset by lower SG&A, better offshoring and service mix improvement. Other income came in materially above estimates at Rs6.52bn (up 55% qoq) resulting in net profit coming largely in line with expectation. On the employee front, net additions remained strong growing 3.4% qoq. Attrition continued its downward trajectory to 14.7% (15.4% in Q3 FY12) 
 
FY13/Q1 FY13 dollar revenue guidance disappoints; Wage hikes decision deferred  
Infosys’ FY13 dollar revenue growth guidance came in as a material negative surprise. Company has guided for 8-10% of dollar revenue growth for FY13, markedly lower than the industry growth guidance of 11-14% given by Nasscom. This highlights the uncertainty faced by the company in terms of client spending visibility. Q1 FY13 guidance of flat dollar revenues too came in below estimates of 1-3% qoq growth.  Infosys has also deferred wage hikes for the full year, as a cautious move in the weak environment. On the operating margin front company has guided for a 200bps correction in Q1 on the back of visa costs and local hiring. It is expected to correct 50-100bps over the full year on the back of utilization correction (hiring target of 35000 employees). Company intends to utilize the benefits of rupee depreciation by investing in recruiting locals as well as strengthening S&M.
 
Reduce FY13E/FY14E earnings estimates by 5%/6%; Decrease the TP and rate the stock as Market Performer
Despite the various positives of the result viz. decent margin performance and strong client & employee additions, Q4 FY12 has been decidedly below expectations in terms of revenue performance. More importantly, the meek revenue growth guidance for FY13 due weakened business momentum has also been a significant dampener. Leadership changes in certain clients, push out of regulatory compliance related spending and in general weak discretionary spending are near term concerns as evident in the management commentary. We tweak our assumptions to factor in the same and resultantly cut our FY13E/FY14E earnings estimate by 5%/6% respectively. We decrease our 9-month to Rs2570 and rate the stock as a Market Performer.

Financial summary