Infosys - Strong quarter; consistency in execution yet to be seen - Avendus

The 2.7% q-o-q USD revenue growth was led by a 4.1% volume growth and 0.6% fall in realisation, impacted by adverse cross currency movement. Excluding Lodestone, a c1.7% q-o-q growth was still ahead of our estimate. The upper end of the FY14f guidance at 10% growth implies a 1.4% q-o-q increase in the remaining three quarters, which appears conservative. Large deals worth more than USD600mn won during the quarter and a rise in the number of USD100mn+ clients, boosts our confidence over the company achieving the guidance. However, lack of consistency in performance amid rising attrition, makes us cautious. We estimate USD revenues to grow at 10% in FY14f. Our Jun14 TP of INR2,719 is based on our target P/E multiple of 14.0x. We maintain a Hold, until we see consistency in execution.

Volume-driven growth is encouraging; client metrics remain strong

A 4.1% increase in volumes was largely driven by Lodestone and North America. Revenues from Lodestone went up 28.9% with organic growth coming in at 1.7% q-o-q. Part of this was due to re-allocation of revenues from Infosys UK to Lodestone; excluding this, Lodestone still grew c18.0%. North America rose 4.8%, whereas Europe declined 3.0%. Europe, excluding Lodestone, declined 8.4% q-o-q. During the quarter, 66 new clients were added and 7 large deals worth more than USD600mn were signed. Revenues from top-five clients rose 4.1% q-o-q and the number of USD100mn+ clients went up by 3 to 15.

Guidance maintained; rising attrition worrisome

The FY14f USD growth guidance was maintained at 6%–10%, despite a strong quarter. Management commentary was not particularly encouraging, and indicated weakness in discretionary spending and pressure on margins. Despite strong client metrics, a ramp up in execution and sustained recovery might take time, given the ongoing organisational restructuring. Attrition, at 16.9%, is at its historical high; exits at the management level, in particular, are a cause of concern. High attrition, toughening visa laws and pricing pressure in the renewal deal market could impact margins, going forward.

Revise estimates upwards; maintain Hold

We revise our FY14f and FY15f estimates upwards and our forecast implies a 10% USD revenue growth in FY14f. Our revised estimate implies an EPS growth of 12% in FY13. We maintain our Hold rating and revise our TP to INR2,719, after the rollover to Jun14 based on our target P/E multiple of 14.0x. Key risks to our call are continued pressure on discretionary spending and high attrition.

Source : Equity Bulls

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