Infosys - Q1FY2013-14 Result Review - Angel Broking

Infosys reported a healthy set of results for 1QFY2014. Its dollar revenues grew by 2.7% qoq (against an estimate of 1.5% qoq) to US$1,991mn, aided by a 4.1% qoq volume growth, led by recovery in application development and consulting revenues. Pricing went down by 0.7% qoq due to negative cross currency movement. The overall volume growth was robust at 4.1% qoq – with a 5.8% onsite volume growth and 3.3% offshore volume growth. In INR terms, revenue came in at Rs. 11,267cr, up 7.8% qoq. The company's EBIT margin inched up slightly by 9bp qoq to 23.6%, while EBITDA margin remained almost flat qoq at 26.5%. The gains from the rupee's depreciation were offset by the negative impact of wage hikes given to the Sales team from May 2013 of ~8% and onsite wage hikes given in February 2013. The PAT came in at Rs. 2,374, down 0.8% qoq.

Infosys maintained its FY2014 USD revenue growth guidance at 6-10%, which is encouraging, as against our expectation of the company reducing it down to 6-8%. We believe a healthy 1QFY2014 performance increases the probability of the company achieving/beating the top end of the guidance. Post 1QFY2014 results, Infosys requires ~1.4% CQGR for the remaining quarters to meet its upper end of the guidance which we believe the company can possibly achieve. In INR terms, the company has given revenue guidance of 13-17% (assuming USD/INR rate at 59.39). The Management commentary indicates that the environment remains challenging and the company continues to see pricing pressure in large deals coming in re-bid market space because of competitive intensity. Over FY2013-15E, we expect USD and INR revenue to grow at a CAGR of 9.2% and 12.6%, respectively. The Management indicated that the company has given wage hikes of ~8% offshore and ~3% onsite from July 1, 2013 which will again impact the operating margin negatively by ~300bp in 2QFY2014. Going ahead, we expect the EBIT margin of Infosys to decline to 23.4% and 23.6% for FY2014 and FY2015, respectively from 25.8% in FY2013. Considering Infosys' current quarter results as well as management commentary, it seems that some parts of Infosys' new strategy are working, although numbers could remain volatile in the near term.

We value the stock at 15x FY2015E EPS of Rs. 189.4, which gives us a target price of Rs. 2,820. We maintain our Neutral rating on the stock.

Source : Equity Bulls

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