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Research
Infosys - At an inflection point - Edelweiss
Posted On : 2012-10-17 11:44:24( TIMEZONE : IST )
Infosys delivered largely in line numbers after a long time with a Q2FY13 revenue growth of 2.6% in USD terms versus our and Street expectation of ~3% (QoQ). Further, the company maintained its full year FY13 revenue growth guidance (ex-Lodestone) of 5% in USD terms. Infosys posted a volume growth of 3.8% while pricing declined marginally by ~20bps on a QoQ basis. We strongly believe that the company will be able to achieve not only FY13 organic guidance of 5% but also a ~15% growth in FY14E and a margin expansion of 90bps. We maintain our BUY rating with a target price of INR2,770.
We believe the company is at an inflection point
We are building in a contribution of USD40mn and USD60mn from Lodestone for next two quarters of FY13E respectively, besides a sequential growth of 3.5% organically. We are also building in a 3% sequential growth for the following four quarters of FY14E, which in our view, will also be helped by full year revenues from Lodestone (Lodestone posted USD220m in CY11) . We believe that the above growth is achievable because the company has won six large deals (of which two are in the infra space where peer set has been very aggressive). Secondly, the company has witnessed a decent growth across verticals and geographies barring India which is an early sign of demand recovery.
On the margin front, we are building in an improvement of 90bps for FY14E inspite of a negative impact of 90bps due to wage hike (w.e.f. Oct13) and a negative impact 90bps due to currency (INR/USD from 53.5 to 52), helped by 120bps of positive impact from an improvement in utilization levels and 150bps due to sub-contracting. We believe utilization will improve once volume growth returns and sub-contracting costs come down as projects start progressing and shift in offshore begins.
Outlook and valuations: At inflection point, maintain 'BUY'
We are building in USD revenue growth of 6%/15% for FY13E/FY14E and cutting our EPS for FY13 by 2.5% to adjust for higher sub-contracting and post sales costs. We value the company at 15x (vs. our earlier 14x multiple to factor in recovery in demand environment and better growth prospects) our FY14E EPS of INR185 implying a TP of INR2,770 and maintain our 'BUY' rating.
