Infosys disappoints on operating front - Q2 FY13 Result Update - Angel Broking

Infosys reported its 2QFY2013 results which were decent on the revenue front but disappointed on the operating front. The most disappointing thing in Infosys' result was the decline in operating margin by ~150bp qoq. In addition, the company announced that its CFO V. Balakrishnan would give up his position from October 31, 2012 and will be replaced by VP-finance Rajiv Bansal. Balakrishnan will, however, continue to be on the company's board and will now look after BPO operations, Finacle and India operations. Infosys has seen a slew of management changes in the last couple of years which is a cause of concern. We maintain our Accumulate rating on the stock.

Quarterly highlights: For 2QFY2013, Infosys reported a revenue of US$1,797mn, up 2.6% qoq, led by a modest volume growth of 3.8% qoq. The EBITDA margin declined by 151bp qoq to 29.1%, because of higher subcontracting costs, warranty costs and one-time payout for promotion-based compensation increases. The PAT came in at Rs.2,369cr, up 3.5% qoq, aided by higher other income of Rs.706cr as against Rs.476cr in 1QFY2013.

Outlook and valuation: The management commentary indicates that the environment remains exactly where it was a few months back. The company continues to see challenges and delays in ramp-ups of the deals being signed. Post 1HFY2013 performance, the company requires a minimum 3.5% qoq growth rate in the next two quarters to achieve its FY2013 USD revenue growth guidance, which in the current scenario looks a bit stretched. Hence, we believe the company can achieve 5-5.5% yoy revenue growth in FY2013, including revenue from Lodestone. Over FY2012-14E, we expect a USD and INR revenue CAGR of 7.0% and 11.0%, respectively. Over FY2012-14E, we expect a CAGR of 8.4% and 8.6% in EBIT and PAT, respectively. At the current market price of Rs.2,396, the stock is trading at 15.0x FY2013E and 14.0x FY2014E EPS. We value the company at 15x FY2014E EPS of Rs.172 and maintain our Accumulate rating on the stock with a target price of Rs.2,573.

Source : Equity Bulls

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