Accumulate Infosys - Q1FY13 Result Update - Kotak

The 1Q results of Infosys came in lower than our estimates. However, the disappointment came in from average realisations rather than from volumes, which surprised positively. Volumes grew by 2.7% (more, if we include the impact of a one-time write-off) whereas, average realisations fell by about 3.7% (3.2% on CC basis). Excluding the impact of one-time write off, revenues were almost in line with estimates.

- Average realisations fell largely due to mix change and also some price re-negotiations, which Infosys yielded to. This reflects some flexibility from Infosys on pricing, we opine. Margins fell by 200bps despite the rupee depreciation. This was largely due to realization drop and increased visa costs. If the mix changes, realisations and margins have scope to improve.

- Discontinuation of quarterly guidance (even if it is temporary) and the reduction in FY13 USD revenue guidance to 'atleast 5%' from '8%-10% growth' earlier, indicates the high degree of uncertainty in the environment. This may keep sentiment subdued in the near term.

- The management's focus on high quality revenues has likely had some impact on the revenue growth. However, we believe this approach will hold the company in good stead over the longer term. Infosys has a TCV (total Contract Value) outstanding of about $387mn already in its Products, Platforms & Solutions business, which is encouraging. It continues to win large deals (4 in 4Q) and has also added 51 clients in 1Q.

- We make changes to our FY13 estimates. We have assumed the rupee at 53/USD in FY13. We expect the EPS to be Rs.168 (Rs.162 earlier) in FY13. We accord valuations which are at a discount to the average valuations of previous low-growth phase (FY10), as the recovery is likely to be gradual.

- We remain structurally positive on the long term prospects of Infosys. The stock is expected to remain range-bound in the short term in the absence of any triggers and any further fall in price can be utilized to buy the stock with a medium - to - long term perspective. We maintain ACCUMULATE with a PT of Rs.2360 (Rs.2599 earlier).

- Recessionary conditions in the developed economies and a sharp appreciation in the rupee beyond our estimates are the key risks to our revised earnings estimates and recommendation.

Source : Equity Bulls

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