Infosys Ltd (Q1 FY14)

India Infoline News Service | Mumbai |

Infosys’ reported dollar revenues in Q1 FY14 surprised by growing 2.7% qoq versus consensus expectation of 1% qoq growth.

CMP Rs2,803, Target Rs2,730, Downside 2.6%
 
  • Revenue growth surprises positively; Pricing corrects marginally 
  • Narrow growth across service lines/geographies; US$100mn+ clients grow materially
  • OPM beats estimates due to stronger support from rupee, utilization;  Employee attrition worrying
  • FY14 dollar revenue guidance maintained ; OPM may continue to remain under pressure
  • Increase estimates on the back of strong results; Volatility may continue for some time; Maintain MP
Result table
(Rs mn)
Q1 FY14
Q4 FY13
% qoq
Q1 FY13
% yoy
Net sales
112,670
104,540
7.8
96,160
17.2
OPM (%)
26.5
26.5
(2) bps
30.6
(413) bps
Depreciation
3,190
3,080
3.6
2,500
27.6
Other Income
5,770
6,740
(14.4)
4,760
21.2
PBT
32,410
31,360
3.3
31,690
2.3
Tax
8,670
7,420
16.8
8,800
(1.5)
Effective tax rate (%)
26.8
23.7
-
27.8
-
Adjusted PAT
23,740
23,940
(0.8)
22,890
3.7
Adj. PAT margin (%)
21.1
22.9
(183) bps
23.8
(273) bps
Reported PAT
23,740
23,940
(0.8)
22,890
3.7
EPS (Rs)
41.5
41.9
(0.8)
40.0
3.7
Source: Company, India Infoline Research

Revenue growth surprises positively; Pricing corrects marginally

Infosys’ reported dollar revenues in Q1 FY14 surprised by growing 2.7% qoq versus consensus expectation of 1% qoq growth. This growth was largely volume led with total efforts growing 4.1% qoq (5.8% onsite, 3.3% offshore). Constant currency realisation corrected 0.4% with offshore realization reducing 1.6% qoq (down 2.4% in last four quarters). Despite strong growth, management commentary was largely tepid considering the uneven deal closure/ramp-up rates and no material change in decision making cycle. Company registered seven large deal wins across verticals with a total TCV of US$600mn+


Narrow growth across service lines/geographies; US$100mn+ clients grow materially

The Q1 FY14 revenue growth, though well spread across verticals, was quite narrow across service lines and geographies. Amongst verticals, the growth was driven by Retail (+5.4% qoq), Manufacturing (+4.1% qoq) and BFS (+2% qoq). Telecom was a laggard de-growing 6.1% qoq. Amongst services, growth was led by consulting and package implementation (+5.6% qoq) and application development (+4.1% qoq). Across geographies, North America contributed the most with 4.8% qoq growth in dollar terms. Within the client basket, top client grew materially by 11% qoq with Top2-5/Top6-10 growing slow at 1.8%/0.5% respectively. The US$100mn+clientele showed material up-tick moving to 15 (compared to 12 last quarter).


OPM beats estimates due to stronger support from rupee, utilization; Employee attrition worrying

The Q1 FY14 OPM was better than our estimates remaining flat qoq at 26.5%. This was against our expectation of 110 bps correction due to headwinds of salary hikes and visa costs. The positive impact of rupee depreciation (+1.2% qoq) and utilization improvement (+0.9% qoq) completely offset the negative impact of wage hikes (-1%), pricing decline (-0.5%) and visa costs (-0.4%). Despite higher tax rates (due to absence of one-off seen last quarter), the net profit came in 5% higher than estimated at Rs23.7bn. On the employee front, though the gross additions were good (10000+), net additions were largely flat on the back of increased attrition. The quarterly annualized attrition rate went up worryingly to 25% (20% in Q4 FY13) with management attributing it to exits pertaining largely to those for higher studies.


FY14 dollar revenue guidance maintained; OPM may continue to remain under pressure

On the back of the stronger than expected revenue performance, management maintained its FY14 dollar revenue guidance at 6%-10% growth (versus our earlier expectation of downgrade to 5%-8% growth).This implies a tepid Q2-Q4 FY14 CQGR of -1% to 1.5%, indicating continued uncertainty in the demand environment (especially the discretionary sending arena). We believe, absence of a decisive improvement in the client decision making to be the key reason for the same. Management indicated that large part of the deal traction is happening in the re-bid space involving traditional ADM and Infra management services. Due to the inherent pricing pressure in the re-bid market, margin pressure of currently ramping up deals and generally tepid discretionary spending there should continued pressure on the operating profitability. We build in a margin correction of ~250bps over FY14 due to these factors, impending offshore salary hikes in Q2 FY14 and higher probable subcontracting costs.

 

Increase estimates on the back of strong results; Volatility may continue for some time; Maintain MP

Infosys’ Q1 FY14 result was a positive surprise with revenues and operating profitability coming in materially ahead of our expectation. While the broad contours of the result were encouraging, the concentrated growth in the consulting business and high attrition were key negatives. Though attrition may have peaked out, the strong growth of the consulting business (especially the material 30% qoq growth in Lodestone) may not be sustainable in the current environment, in our view. The inherent lumpy nature of the business as well as not so comforting management commentary on the discretionary spending supports our thesis. While the probability of the company reaching the top-end of their guidance has increased after strong Q1, this also seems reflected in the strong stock price up-tick post the results. We continue to be constructive on longer term prospects especially with the return of Mr. NRN, but in the near to medium term we would watch for sustainable revenue traction effected by the expected tactical and strategic changes. Immigration bill outcome and Infosys’ margin trajectory are also key monitorables in the coming quarters.  We increase our earnings estimates for FY14/15E by 2/5% respectively and TP to Rs2,730. Maintain MP.


Financial Summary

BSE 1,003.45 [7.65] ([0.76]%)
NSE 1,003.75 [6.75] ([0.67]%)

***Note: This is a NSE Chart

 

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