Infosys Technologies - Results in line with estimates; Initial signs of recovery - BRICS

Infosys reported numbers largely in line our estimates, with US Dollar revenue up 2.6% qoq, but disappointed with a decline of 160bps inthe EBIT margin. We maintain our target multiple of 13.5x, as it will take a few more quarters for Infosys to show consistency in execution, while its margins are unlikely to recover over FY13-14. We raise our target price to Rs2,400 (from Rs2,350), as we rollover to FY14 estimates. Maintain ADD.

In-line results, disappointing margins: Revenue at US$1,797mn, grew 2.6% qoq (as against our estimate of 2.3% qoq), led by a volume growth of 3.8% qoq, with stable pricing (down just 0.2% qoq in Q2FY13, as against 3.7% qoq in Q1). Operating margins contracted, against expectation, by 1.5% qoq, due to sub-contracting costs and provision for post sales servicing.

Initial signs of a turnaround: Management has indicated that its focus on execution (after completing transition to Infosys3.0) is paying off, as evident from the strong growth of 7.8% qoq in Top-5 clients (5.7% in Top-10 and 5% in Top-25). In spite of continued weakness in demand, slow decision making and delay in project starts, pricing has stabilized, and Infosys saw 14 deal wins (6 large deals, and 8 transformational deals).

Maintaining $ revenue guidance, but lowering Rupee and earnings guidance: Organic US$ revenue guidance remained unchanged at US$7,343mn and Infosys will need to record a growth of 3.7% qoq in Q3and Q4 to achieve the guidance. Management is confident of meeting this guidance based on (1) 85% revenue visibility in H2FY13, and (2) 14 deal bookings worth US$0.5bn in Q2. Meanwhile, the Rupee revenue and earnings guidance was cut by 2%, due to currency movements.

Outlook and valuation: The stock trades at a P/E of 14.9x FY13 and 13.5x FY14 our EPS estimates. We have lowered our FY13/14 EPS estimates by 4.4/1.4% to factor in the currency movements and Q2FY13 results. We believe that Infosys may be unable to achieve agrowth of 3.7% qoq in Q3/Q4 due to the challenging global environment, uncertainty of clients' spending pattern, and higher exposure to discretionary projects. Maintain Add with target of Rs2,400.

Source : Equity Bulls

Keywords