Infosys - Performance beats estimates — Management maintains guidance - BP Equities

Infosys delivers excellent set of numbers for the quarter

The revenue in US$ terms grew 2.7% q-o-q to US$ 1.99 bn (ahead of our expectation of US$1.97 bn), driven primarily by 3.4% increase in volumes (4.1% for IT services), 142 bps expansion in utilization rates including trainees offset by 0.6% q-o-q drop in blended pricing. Total Revenues stood at Rs 112,670 mn up 7.8% q-o-q and 17.2% y-o-y. Net profits was up 3.7% y-o-y but declined 0.8% sequentially to Rs 23.7 bn on account of lower other income (forex gain of Rs 130 mn vs Rs 1.2 bn q-o-q) and higher tax rate. Operating margin expanded just 9 bps q-o-q to 23.6% despite significant currency depreciation and rise in utilization, as gains were offset due to onsite salary hikes and higher visa fees. EPS declined 0.8% q-o-q but grew 3.7% y-o-y to Rs 41.5.

Large deal wins, significant clients addition bode well for the company

Infosys won seven large deals amounting to total TCV of US$ 600 mn, six of the seven large deals were in the US, three in financial services and two in manufacturing. The company added 66 new clients in the quarter taking the total clients to 836 in the quarter.

Guidance maintained for FY13E in US$ terms while margins to remain under pressure

Infosys maintained its organic revenue guidance for FY14E at 6-10% y-o-y growth (constant currency guidance at 7-11% y-o-y growth). INR guidance for FY14E stood at 13-17% y-o-y growth (INR assumption of INR 59.4). Positive signs of revival has emerged in the quarter with healthy onsite volumes growth and rise in utilization levels. We believe differentiated growth strategy will payoff well in the long run and the company to be more consistent in performance going ahead. The company has guided for a 300 bps contraction in margins Q2 FY14 on account of hike in offshore salaries by 8% and onsite by 2-3%. We believe that salary hike impact will be more or less absorbed by currency.

Valuation & Outlook

On account of better than expected organic growth, large transformational deal wins, strong performance on onsite volumes front and increase in utilization and productivity we have revised our top line growth to 14.7% and 9.8% y-o-y to Rs 462.8 bn and Rs 508.1 bn in FY14E and FY15E respectively. We expect volumes growth to revive in the coming quarters while pricing to remain flat. We estimate revenues in US$ to come in at $8.0 bn (up 8.5% y-o-y) for FY14E and $8.8 bn for FY14E. However we will have to wait and watch for 1-2 quarters more to get a more clear picture and we expect consistency in performance going ahead. We believe that after a run of ~10% post result there is little room left on upside thus we maintain our "HOLD" rating on the stock with a target price of Rs 2,790 (15x FY15E earnings). The company now trades at a P/E of 15.9x and 14.7x FY14 and FY15 earnings.

Source : Equity Bulls

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