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Research
Infosys - The glass looks half-filled - Prabhudas Lilladher
Posted On : 2012-10-17 11:43:29( TIMEZONE : IST )
Infosys continues to face challenges with regards to holding on to pricing and margins. However, the improving volume momentum indicates that the realization dip is sinking in with volume growth. The naysayers will keep highlighting trouble in clients' revenue bucket and margin pressure, but, gaining volume traction and reiterating back-end loaded growth is another evidence of its conviction to deliver 3.7% CQGR in H2FY13. Better-than-expected volume growth is an evidence of moderate success of aggressive S&M efforts. The company has retained their organic USD revenue guidance. Retain 'BUY' rating with revise TP at Rs2,900 (Old: Rs2,850).
- Volume growth - It does matter: Infosys reported volume growth at 3.8% QoQ (Onsite: 4.4%, Offshore: 3.6%), which was better than our/consensus expectation. We see acceleration in volume growth; a positive for the overall business. Deal ramp-up, client budgets and bottoming out rampdown give management the confidence for stronger H2FY13.
- Flexibility in deal structuring - To improve momentum: Infosys has been flexible in pricing to structure the deal. Moreover, recent deals indicate the company being forthcoming to acquire clients' asset and employees to consummate the deal. The macro-environment supports more of these deals.
- Revising FY13 & FY14 estimates down for lower margin.
- Subcontracting - here to stay: In-line with our hypothesis of higher subcontracting cost ("The rise of sub-contracting and onsite cost", August 22, 2012), the margin was impacted. We see this trend to be sticky in the near term.
- How did margin erosion stack-up? Infosys witnessed margin decline of 166bps QoQ (~240bps incl. reversal). Increase in employee cost (130bps), post-sales client support (50bps) and sub-contracting cost (50bp) resulted in margin erosion in Q2FY13. The management is confident of attaining their margin guidance despite wage hike, transition cost and fresher intake.
- Valuation & Recommendation - Retain 'BUY', revise TP to Rs2,900: We expect FY13 momentum to be in-line with guidance. We revise TP to Rs2,900, 16x FY14e (10% discount to TCS) earnings estimates and roll our model to FY14.
