Infosys Ltd (Q2 FY13)

India Infoline News Service | Mumbai |

Infosys kept its FY13 dollar revenue growth guidance of 5% unchanged but its constant currency growth guidance was marked down marginally from 6% to 5.7% to incorporate adverse currency movement.

CMP Rs2,396, Target Rs2,400, Upside 0.2%
  • Dollar revenue disappoints despite strong volumes; Offshore pricing corrects
  • Barring BFS vertical, growth was broad based across verticals/services
  • OPM performance materially below estimates; Salary hikes to take effect in H2 FY13
  • Guidance largely in-line; H2 FY13 implied growth rate demanding
  • Revise estimates to include Lodestone; Stock expected to remain range bound; Maintain MP
Result table
(Rs mn) Q2 FY13 Q1 FY13 % qoq Q2 FY12 % yoy
Net sales 98,580 96,160 2.5 80,990 21.7
Operating profit 28,680 29,430 (2.5) 25,140 14.1
OPM (%) 29.1 30.6 (151) bps 31.0 (195) bps
Depreciation 2,710 2,500 8.4 2,330 16.3
Other income 7,060 4,760 48.3 3,870 82.4
PBT 33,030 31,690 4.2 26,680 23.8
Tax 9,340 8,800 6.1 7,620 22.6
Effective tax rate (%) 28.3 27.8 - 28.6 -
Adjusted PAT 23,690 22,890 3.5 19,060 24.3
Adj. PAT margin (%) 24.0 23.8 23 bps 23.5 50 bps
Reported PAT 23,690 22,890 3.5 19,060 24.3
EPS (Rs) 41.4 40.0 3.5 33.3 24.3
Source: Company, India Infoline Research

Dollar revenue disappoints despite strong volumes; Offshore pricing corrects

In a seasonally strong quarter and in absence of one-off revenue reversal as seen last quarter, revenues growth in Q2 FY13 was weak at 2.6% qoq versus our expectation of 3.1% growth. Volumes on the flip-side were strong growing 3.8% qoq with 4.4% qoq growth onsite and 3.6% qoq offshore. Although the blended pricing remained largely flat (-0.2% qoq), the offshore pricing drop of 1.3% was concerning. Management, however, commented on a stable pricing environment. Deal traction was strong with six large deals won (of which two being >US$200mn in TCV). Management also alluded to improved products& platform order book of ~US$500mn (US$380mn last quarter).  


Barring BFS vertical, growth was broad based across verticals/services

With an exception of financial services vertical, the Q2 FY13 growth performance for Infosys was largely broad based. Five out of eight service lines grew above company average on a sequential basis with Testing (+6.2% qoq) and IMS (+5.6% qoq) leading the growth. Among verticals, Insurance bounced back (+4.1% qoq growth) post two quarters of de-growth. Retail and Manufacturing continued to drive growth posting 3%+ dollar growth sequentially. Within geographies, Europe/RoW/NA all grew well sequentially (+5%/3.4%/2.2% qoq growth). Amongst clients, Top6-10 clients growth was impressive at 6% qoq in dollar terms.


OPM performance materially below estimates; Salary hikes to take effect in H2 FY13

Against our estimate of 70bps expansion, the OPM came in materially lower at 29.1% (correcting 151bps). This correction was largely due to employee promotions, increased sub-contractor costs and post sales customer support expenses. We note that this correction was despite the tailwinds like absence of one-off revenue reversal/visa costs, rupee depreciation and improved volumes. Better than expected other income offset the weak operating performance resulting in a largely in-line PAT of Rs23.7bn. As expected, management declared salary hikes of 6% offshore (effective Q3 FY13) and 2-3% onsite (effective Q4 FY13). On the employee front, company added 10420 employees on a gross basis. With attrition remaining stable at 15%, net addition was decent at 1.7% of Q1 FY13 base. 


Guidance largely in-line; H2 FY13 implied growth rate is demanding

Infosys kept its FY13 dollar revenue growth guidance of 5% unchanged but its constant currency growth guidance was marked down marginally from 6% to 5.7% to incorporate adverse currency movement. Company is expected to include its Lodestone acquisition in its guidance in the next quarter. Although the full year growth guidance was in-line with expectation, lower revenue growth in Q2 FY13 implies a demanding dollar revenue CQGR of 3.7% for Q3-Q4 FY13.  This growth expectation, we believe, is a bit stretched considering current demand scenario as well as traditional weakness of H2.  The rupee EPS guidance was marked down by Infosys to Rs160.61 from Rs166.46 earlier on the back of adverse currency movements.  


Revise estimates to include Lodestone; Stock expected to remain range bound; Maintain MP

Infosys’ Q2 FY13 results were unimpressive from various perspectives especially the weaker than expected revenue/OPM performance. Softness in its offshore pricing also indicates increased competitive pressure. On the flip side, we do note the positives of good deals wins, increasing traction in IMS and its platform business and growth in its Consulting/SI order book. Overall we remain circumspect of the Company’s near term growth prospects (both in absolute terms as well as relative to peers like TCS/HCLT) considering its discretionary services and BFS exposure. Post incorporating the Lodestone acquisition we estimate dollar revenues/rupee earnings to grow at 10%/9% CAGR over FY12-14.  Valuing the company at 14x FY14E earnings we maintain our 9-month TP of Rs2,400. Assign MP. 

   
Financial Summary
Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E
Revenues 274,943 335,853 399,332 443,993
yoy growth (%) 20.9 22.2 18.9 11.2
Operating profit 89,560 107,080 115,259 125,733
OPM (%) 32.6 31.9 28.9 28.3
Reported PAT 68,230 83,160 91,407 99,139
yoy growth (%) 8.9 21.9 9.9 8.5
         
EPS (Rs) 118.8 144.8 159.2 172.6
P/E (x) 20.2 16.5 15.0 13.9
Price/Book (x) 5.3 4.4 3.7 3.1
EV/EBITDA (x) 13.6 10.9 9.7 8.4
RoE (%) 27.8 29.0 26.5 24.2
RoCE (%) 37.7 40.6 36.9 32.9
Source: Company, India Infoline Research
BSE 1,019.70 7.25 (0.72%)
NSE 1,019.70 6.60 (0.65%)

***Note: This is a NSE Chart

 

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