Infosys - Results & Guidance Disappoint – Downgrade to HOLD - Karvy

Infosys' results disappointed on the back of a miss in the quarter on both, revenue growth (-1.9% QoQ) as well as guidance/outlook for FY13. The FY13 USD revenue guidance of 8-10% YoY growth fell short of our and consensus expectations. The guidance for Q1FY13 suggests 0-1% sequential growth. The results and the guidance will likely re-fuel fresh debate on "structural issues" with the Company. Hence, while we have lowered our target price to Rs. 2,550 per share, we downgrade our recommendation on the stock to "HOLD" from "BUY".

Quarter Details: Pricing declined 1.3% QoQ on constant currency basis. While the attrition recorded at 14.7% and net addition stood at 4,906 (vs. 3,266 in Q3) with lateral addition recorded at 4,727 (vs. 3,863 in Q3). Utilisation (including trainees) was lower at 67.2% (vs. 69.9% in Q3). US saw a strong decline of 4% (in constant currency terms), while the FSI declined 5%. We believe that the players like HCL Tech/Cognizant and others could win deals, making it difficult for Infosys to get deals at premium pricing. Cash and equivalents stood at US$4.1bn in Q4.

Disappointing USD Guidance for FY13: Infosys guided to 8-10% YoY revenue growth for FY13 (vs. our expectation of 11-14%). After a revenue decline of 1.9% in Q4FY12 and flattish revenue guidance for Q1FY13, Infosys will have to deliver revenue CQGR of 4.8% over Q2-Q3-Q4FY13, which looks stretched. Its performance is volatile and Management's ability to predict this performance has become less accurate in the face of poor visibility in macro environment. We expect this to continue for some time, casting continued pressure on the stock.

Outlook & Valuation

We lower our earnings estimates for Infosys by 6.3% and 8.6% for FY13E & FY14E, respectively to factor in lower revenue growth trajectory. We have reduced our target to Rs. 2,550 (vs. Rs. 3,100 projected earlier), implying 15.5x average of for FY13E & FY14E EPS of Rs. 164 (vs. 18.5x forward earnings projected earlier) to account in for increased macro concerns.

Risks

- Higher exposure to Consulting/Package Implementation compared to peers

- Lower-than-expected demand ramp-up in key areas like the US.

Source : Equity Bulls

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