Infosys Ltd (Q3 FY13)

India Infoline News Service | Mumbai |

Raise estimates to incorporate Q3 out-performance; Maintain MP till sustained performance emerges

CMP Rs2,712, Target Rs2,850, Upside 5.1% 
  • Dollar revenues surprise positively due to better than expected volume and pricing
  • Narrow based growth across business segments; BFSI, consulting/SI and Europe drive the out-performance
  • OPM above estimates buoyed by higher realisation and cost efficiency
  • Guidance beats expectations on the back of better than expected ramp-ups
  • Raise estimates to incorporate Q3 out-performance; Maintain MP till sustained performance emerges 

Result table

(Rs mn) Q3 FY13 Q2 FY13 % qoq Q3 FY12 % yoy
Net sales 104,240 98,580 5.7 92,980 12.1
Operating profit 29,700 28,680 3.6 31,330 (5.2)
OPM (%) 28.49 29.1 (60) bps 33.7 (520) bps
Depreciation 2,930 2,710 8.1 2,340 25.2
Other income 5,030 7,060 (28.8) 4,220 19.2
PBT 31,800 33,030 (3.7) 33,210 (4.2)
Tax 8,110 9,340 (13.2) 9,490 (14.5)
Effective tax rate (%) 25.5 28.3 - 28.6 -
Adjusted PAT 23,690 23,690 - 23,720 (0.1)
Adj. PAT margin (%) 22.7 24.0 (131) bps 25.5 (278) bps
Reported PAT 23,690 23,690 - 23,720 (0.1)
EPS (Rs) 41.4 41.4 - 41.5 (0.1)
Source: Company, India Infoline Research

Dollar revenues surprises positively due to better than expected volume and pricing
Infosys Q3 FY13 top-line performance was a positive surprise with volumes and more importantly pricing coming ahead of expectation. Consolidated dollar revenues (including Lodestone) grew 5.8% qoq in constant currency terms. This out-performance was solely on the back of organic revenues (+4.1% qoq) which grew faster than anticipated supported largely by the strong realization improvement. Organic volume growth of 1.5% qoq too was marginally ahead of our expectation (+1% qoq). One of the key highlight during the quarter was the US$730mn of outsourcing deal wins which came on the back of six large deals won in the last quarter.

Narrow based growth across business segments; BFSI, consulting/SI and Europe drive the out-performance
The better than expected performance (organic) was driven largely by certain key verticals, services and geographies. Due to strong ramp-ups of key transformational deals won in last two quarters, the consulting/SI business showed a strong growth  of ~8% qoq (organic). Cost efficiency services like BPO, IMS also grew strongly (15.2% qoq and 7.9% qoq respectively). On the other hand, discretionary services Application development (-1.2% qoq) and engineering services (0.1% qoq) were weak. Amongst verticals, BFSI grew strongly at 6.3% qoq in dollar terms with fear of furloughs (suspension of work) not materialize as previously anticipated.

Supported by Lodestone, Europe geography growth was robust at 16.5% qoq (~6.5% qoq organically). India business grew 46% qoq supported by ramp-up of recently won deals (India post, MCA). Products segment (Finacle) growth was also robust at 9.1% qoq. Growth amongst clients was driven by Top 2-5 and Non-top 10 which grew 9.9%qoq and 8.5%qoq respectively in dollar terms on a consolidated basis.  

OPM performance above estimate buoyed by higher realisation and cost efficiency
Infosys’ Q3 FY13 OPM performance came in above estimate primarily due to better price realization (on the back of strong consulting/SI growth) and also supported by G&A cost squeeze. Operating margin corrected merely 60bps to 28.5% versus estimated correction of 140bps. More specifically, the headwinds of 6% offshore salary hikes, Lodestone integration and rupee appreciation were offset to a large extent by the 3.7% qoq increase in realization and reduction in G&A expenses by 2% qoq. On the back of revenue, OPM beat coupled with lower tax-rate (25.5% versus 28.3% in Q2 FY13), PAT remained flat qoq at Rs23.6bn as against our expectation of 9% correction. Going ahead, onsite salary hikes and Lodestone related payments are key near term margin headwinds. Net employee addition (excluding Lodestone) was weak growing a meager 0.6% qoq. Attrition is believed to have stabilized with LTM attrition rate flat at 15.1% for the quarter.

Guidance beats expectations on the back of better than expected ramp-ups
Infosys maintained its FY13 organic dollar revenue guidance of 5% much ahead of consensus expectation of a 100bps cut. Including the Lodestone acquisition, company expected the FY13 dollar revenues to grow 6.4% yoy. Q4 FY13 implied guidance now stands at 4.1% qoq (2.7% qoq organically).  We believe that the better than expected ramp-ups/ lower furloughs in its key vertical of BFSI and robust ramp-ups of transformational deals won in last couple of quarters has resulted in this consensus-beating guidance. On the margin front, company has guided for a correction of 100-130bps in Q4 FY13 largely due to onsite salary hikes and promotions. Consequently, FY13 rupee EPS guidance has been upped marginally by 1.4% to Rs162.8.  Management indicated 6000 campus offers for FY14 with hiring strategy shifting towards just-in-time hiring in coming quarters. 

Raise estimates to incorporate Q3 out-performance; maintain MP till sustained performance emerges
In a seasonally weak quarter with dampened expectation (post weak mid-quarter management commentary), the Infosys’ Q3 FY13 result report as well as its guidance were materially better than expected.  One of the key ingredients of the core business out-performance, though, was the strong ramp-up of transformational deals won in recent quarters. However, considering the discretionary nature of such projects, their lack of stickiness and quick ramp-up behavior, we remain circumspect about a sustained traction from Infosys in near to medium term. Management commentary too has remained cautious with continued delay in decision making by clients especially in BFSI vertical.  Though the improved deal wins (14 large deals won in past two quarters) and strong client addition is enthusing, we would wait for signs of continued deal traction/market share gain especially considering the slowing demand environment, Infosys’ higher discretionary services and BFSI exposure.  We increase our earnings estimates for FY13E/14E by 3.1%/1.4% respectively and add FY15 estimates.  Due to the strong rally post the better-than-expected results, stock is now trading at ~13.7x our FY15E earnings. Maintain MP with an increased 9-month TP of Rs2850.

Financial Summary
Y/e 31 Mar (Rs m) FY12 FY13E FY14E FY15E
Revenues 335,853 404,473 454,160 497,297
yoy growth (%) 22.2 20.4 12.3 9.5
Operating profit 107,080 117,174 128,853 147,180
OPM (%) 31.9 29.0 28.4 29.6
Reported PAT 83,160 94,274 101,790 113,898
yoy growth (%) 21.9 13.4 8.0 11.9
         
EPS (Rs) 144.8 164.2 177.3 198.3
P/E (x) 18.7 16.5 15.3 13.7
Price/Book (x) 5.0 4.1 3.5 2.9
EV/EBITDA (x) 12.6 11.0 9.5 7.9
RoE (%) 29.0 29.0 27.2 24.5
RoCE (%) 40.5 40.5 36.9 33.2
Source: Company, India Infoline Research

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