Infosys - Volume acceleration at stable pricing is key - ENAM

Volume growth along with stable pricing was comforting but margin disappointed due to higher onsite costs. Management indicated decision making remains slow and hence maintained its organic FY13 USD revenue growth guidance of 5%. However, we believe Infosys needs to accelerate volume growth to absorb higher operating costs.

Volume growth sustainability concerns abate...

IT Services volume growth of ~4% QoQ (~3% in Q1) was better than our estimate of 3.5% indicating steps taken to shore up near-term performance are bearing fruits. Q2 saw 6 deals with 2 over USD 200 mn, 8 transformational deals and TCV signings of USD 100 mn in PPS# (taking total TCV signings to USD 500 mn). Top 5 and Top 10 clients grew ~8% and ~6% QoQ respectively in USD terms (comparison based on same set of clients).

...but margin pressure on the rise:

Q2 EBIT margin decline of 170 bps QoQ was higher than expected largely due to higher subcontracting costs and provisions for post-sales client support. Infosys also announced wage hikes (Q3: 6% offshore, Q4: 2-3% onsite), which would further impact margin in H2FY13. Fresher intake and consolidation of Lodestone (will be EPS accretive in 18 months post acquisition) would also put pressure. We thus reduce our FY13E/FY14E EBIT margin by 80/45 bps to 26.8%/27.2%. Excluding Lodestone, management guided for 200 bps margin impact from wage hikes and INR re-set at Rs 53.

Valuation: Our FY13E/FY14E USD revenue growth stands at 5%/14%. We revise downwards our EPS for FY13E/FY14E marginally to Rs 162/Rs 179 respectively. Maintain HOLD with target price of Rs 2,325 (13x FY14E), a 3% downside from CMP.

Source : Equity Bulls

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