- Organic dollar revenues remain flat sequentially; Volumes disappoint
- Patchy growth across business segments; Employee attrition swells
- OPM corrects materially due to lower volumes and higher than expected Lodestone integration impact
- FY14 dollar revenue guidance a let-down; OPM may continue to remain under pressure
- Reduce estimates on weak results and outlook; Recovery to take a while; Maintain MP
|(Rs mn)||Q4 FY13||Q3 FY13||% qoq||Q4 FY12||% yoy|
|OPM (%)||26.50||28.5||(199) bps||32.6||(612) bps|
|Effective tax rate (%)||23.7||25.5||-||29.8||-|
|Adj. PAT margin (%)||22.9||22.7||(17) bps||26.2||(326) bps|
Organic dollar revenues remain flat sequentially; Volumes disappoint
Infosys’ Q4 FY13 top-line performance was a negative surprise with consolidated dollar revenues growing only 1.4% qoq versus expectation of 4% growth. Organically, revenues were flat qoq against expectation of 2.5% qoq growth. The weak performance was on the back of lower than expected volume growth (+1.8% qoq) and correction in realisation (-0.4% qoq in constant currency terms). While correction in realisation was anticipated due to skewed growth in products and consulting/SI last quarter, the tepid volumes were clearly lower than expected. Management attributed the weak volume traction to slower ramp-ups and pushing of decisions to the coming quarter. In rupee terms, reported revenues were up marginally to Rs104.5bn. Infosys reported 12 new deal wins in the products and platforms space increasing its TCV to US$685mn.
Patchy growth across business segments; Employee attrition swells
The growth across business segments for Q4 FY13 was narrow based with select verticals, services and geographies showing meaningful growth. Amongst verticals, Healthcare, Manufacturing and BFS grew the most with revenues increasing 7.9% (~2% organic), 3.7% (~1.7% organic) and 3% sequentially in dollar terms. Within services, growth was driven by IMS, Products and Consulting/SI which grew 5.8%, 4% and I.7% (~-2.6% organic) qoq.
Amongst geographies, Europe led the pack with a growth of 5.6% qoq (flat on an organic basis). Within the client base, the Top 2-5 clients grew higher than company average at 2.3% qoq. On the back of more than sufficient bench, employee additions were tepid (+0.1% qoq). Quarterly annualized attrition went up from 16.9% to 20.3%.
OPM corrects materially due to lower volumes and higher than expected Lodestone integration impact
Infosys’ operational profitability was another material disappointment from the quarter results perspective. The OPM corrected 200bps qoq to 26.5%, (versus expectation of 80bps correction) continuing its downwards trajectory. In FY13 the OPM corrected 320 bps and is at the lowest level both from quarterly or annual perspective. Higher than expected margin impact due to Lodestone integration (~130bps) and lower than expected volumes were the key reasons for the sharp OPM correction. The disappointment on the margin front was more than offset by the robust other income and lower tax rate resulting in PAT coming marginally ahead of expectation at Rs23.9bn.
FY14 dollar revenue guidance a let-down; OPM may continue to remain under pressure
The biggest negative surprise from the Q4 FY13 results was the bleak outlook for FY14 given out in the form of 6%-10% dollar revenue growth. Additionally profitability guidance too was discontinued reflecting heightened uncertainty on the margin front. The dollar revenue guidance implies only 0.5%-2% CQGR over next four quarters much below industry growth expectation and our estimates. The wider than usual range also indicates lower demand visibility in the discretionary spending space and increased pricing pressure/competition in the commoditized traditional services. Margin outlook also was discouraging with evident pressures on pricing for the traditional services, probability of higher subcontractor costs, wage hikes and lower margin profile of Lodestone. From the hiring perspective, considering the large bench, management indicated addition of only ~10K freshers with rest of the requirements being met on a need basis.
Reduce estimates on weak results and outlook; Recovery to take a while; Maintain MP
In our Q3 FY13 result note, we had stated our doubts on the sustenance of the strong discretionary services growth in the company’s performance. This is especially due to lumpy nature of discretionary projects, their lack of stickiness and weak management commentary on client decision making as well as spending. Disappointing Q4 results have further validated our caution. Additionally, the management commentary on slower ramp-ups, pushed out decision making and heightened pricing pressures in the traditional services (ADM, testing, IMS) has further solidified our cautious view in the near to medium term. On a small positive note, management alluded to improving win-rates in its business IT segment as well as decent discretionary spending in its Manufacturing and ECS verticals. Overall, as also visible in the FY14 revenue guidance, the weak volume traction should continue in the near term. Also we expect coming fiscal to see further margin erosion before picking up in FY15. Post the weak results and guidance we reduce our FY14/15E earnings by ~6% each. Considering the weak near-medium term growth prospects (both in absolute and relative terms) as well as possible further erosion in profitability, we now assign a P/E of 13x FY15E earnings (20% discount to TCS) and arrive to 9-month TP of Rs 2,406.
|Y/e 31 Mar (Rs m)||FY12||FY13||FY14E||FY15E|
|yoy growth (%)||22.2||20.0||7.4||8.6|
|yoy growth (%)||21.9||13.3||1.8||10.9|
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