Infosys Technologies - Results defy expectations, Consulting drives growth; maintain Add - BRICS

Infosys defied expectations by reporting strong Q3 results and maintained its FY13 organic growth guidance. Revenue was driven by Consulting (up 15.4% qoq), which has been delivering a highly volatile quarterly performance (Exhibit 1). Also, with 8 wins in Q3 and 6 wins in Q2, the momentum in large deal wins has accelerated (Exhibit 2). We believe Infosys' growth trajectory, ex-Consulting, will gradually improve, as large deals begin to ramp-up, though disappointment in some quarters of FY14/15 is likely due to volatile growth in Consulting (33% of revenue). We raise our target multiple to 15x (earlier 13.5x), after factoring in the improving momentum in large deal wins and upward revision to our estimates in view of better Q3 results. We raise our TP to Rs2,850 (from Rs2,400). Maintain ADD.

Revenue, margins beats expectation: Revenue grew 6.3% qoq (organic growth of 4.2% qoq) to US$1,911mn, led by organic volume growth of 1.5% qoq and pricing uptick of 1.8% qoq and contribution of US$39mn from Lodestone. Operating margin at 25.7% was also higher than estimated, as strong pricing improvement negated impact of wage hikes.

Defying expectations by maintaining organic guidance: Infosys maintained its organic US$ revenue guidance at US$7,346mn (growth of 5%) and raised its overall revenue guidance to $7.45bn, which factors in $104mn from Lodestone. Operating margin in Q4 is likely to be impacted by 103bps from onsite wage hike of 2-3% and Lodestone integration.

Management commentary remains cautious: Management indicated no change in demand environment over Q3, though near-term discretionary spending has returned. CY13 IT budgets are likely to be stable-to-down, with uptick in off shoring, as clients continue to seek cost management and better efficiency with a shift towards outcome based deals.

Valuation: Stock trades at P/E of 16.5x FY13, 14.2x FY14 and 13.3x FY15 earnings. We have raised our FY13/14/15 EPS estimates by 1.8/7.3/5.3% to factor in currency movement, better Q3 results and full impact of Lodestone acquisition. Maintain ADD with TP of Rs2,850, in view of acceleration in large deal signings, margin support from shift towards Consulting, and revival in growth momentum.

Source : Equity Bulls

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