BUY Infosys - Missing the forest for the trees - ICICI Securities

We see the street's focus on Infosys's FY13 guidance as extreme and something that deflects attention away from the strategic changes the company has embarked upon that should drive better secular growth. However, before we delve into such actions in detail, let us get the near-term demand picture out of the way. We think there was never any doubt that Infosys would face a great challenge in meeting the 5% YoY revenue growth in FY13 which implied revenue CQGR of 3.7% over Q3 and Q4. It was clear that the numbers would fall short, but the moot question was, how short? In our own analysis, we were already expecting a lower revenue growth of 3% each over the next two quarters. However, we now see a downside even to our expectations.

Infosys still sees a distinct possibility of meeting 5% YoY dollar revenue growth in FY13 if 1) there is a material acceleration in deal closures over the next few months as the pipeline remains healthy and 2) as the impact of extended furloughs and Sandy will not be there in Q4FY13. Even though such an expectation indicates that Q3FY13 cannot be terribly bad for the company (else Q4FY13 will require an unprecedented hockey-stick kind of growth), we will put more focus on what the company is doing than what it is saying. Infosys is hinting at project ramp-downs with large clients in Retail, Manufacturing and Telecom verticals (two each in the first two and one in the third vertical), which was incremental to its expectations, along with slow deal closures as the key reasons for a potential shortfall in sales.

As such, Infosys is deferring the joining of 5,000 freshers into FY14 with gross addition in H2FY13 expected at just 10k as against the earlier expectation of 15k. With exits likely to be 11-12k at attrition of 15% (lower QoQ on wage hikes), Infosys is relying entirely on increase in utilisation to meet volume growth. However, meeting 5% volume growth for the full year entirely through utilisation points to a significant uptick in utilisation; closer to the company's target range in just two quarters which we see as unlikely. In essence, Infosys is creating capacity for growth well lower than 5%. We therefore, lower our revenue growth expectation for Q3FY13 to 1% though keep Q4FY13 growth estimate unchanged at 3%. Increase in utilisation, focus on cost rationalisation and benign currency v/s assumptions (Rs54 v/s Rs53 assumed in the guidance for H2FY13) are expected to partially offset the impact of lower revenue on margins.

The above being said, we see the focus on near-term demand picture for Infosys as misplaced. Irrespective of what happens in the short term, it is important to note that inertia is giving way to action at Infosys. There is pro-activeness to tweak the long-term strategy to adjust to a scenario where sluggish economic growth may be the "new normal". We see changes around 1) Pricing flexibility / decentralization of decision making, 2) Emphasis being back on Run-The-Business segments and 3) Risk aversion getting addressed.

Source : Equity Bulls

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