Infosys - Q2FY14 RESULT UPDATE - Sushil Finance

CMP Rs.3274, Maintain HOLD, Increased Target of Rs.3515

Decent Results driven by 3.1% QoQ volume growth

During Q2FY14, Infosys delivered decent performance as its USD Revenue grew 3.8% QoQ to 2,066 mn which was slightly ahead of street's expectations of 2.4-3% QoQ growth. The integration of Lodestone completed during the quarter which contributed USD 98.13 mn as against 90.7 mn in Q1FY14. While in constant currency its USD Revenues grew by 4.2% QoQ led by 3.1% QoQ volume growth & about 0.9% QoQ increase in price realization. INR Revenues grew by 15.1% QoQ to Rs.129,650 mn driven by ~11% QoQ increase in average Rs/USD rate. The decent growth during Q2 can be attributed to strong growth from US (3.9%) & Europe (5.2%) regions led by manufacturing (6.8%) & ECS (4.7%) verticals.

EBIT Margins flat on wage inflation and higher SG&A cost

Its EBIT for Q2FY14 grew 14.7% QoQ to Rs.30,560 mn, while the EBIT margins remained stable at 23.6%, as the benefits of Rupee deprecation (~11%) & improved utilization (73.7 vs. 72.4%), was offset by (i) 8% increment for offshore employees effective 1st july'13 & substantial increase in S&M expenses (ii) higher performance linked bonuses and (iii) negative cross currency impact. The EBIT margins were well below our estimates of 26%. With lower other income (Rs.5,100 mn), its APAT grew by 10.6% QoQ to Rs.26,260 mn. Going forward, despite its continued investments in sales & marketing, higher wages on account of increments & variable bonuses, we expect its EBIT margins to remain stable with improved utilization and other cost optimization measures. Considering these factors, we expect Infosys to deliver 23.4% EBIT margins in FY14 vs. 25.8% in FY13. During the quarter, the company won 5-6 large deals of above USD 50mn including 3 BFSI deals, while deal pipeline remained stable and competitive.

FY14 Dollar Revenue growth Guidance revised to 9-10%

Given its decent growth in H1FY14, the management revised its USD Revenue growth guidance to 9-10% assuming H2FY14 to be softer in terms of business due to less number of working days owing to holidays & furloughs form the clients. The management was expected to revise its growth guidance which was on lower side. However, the revised guidance is still below the expectation of 9-12%. The company expects the deal momentum to continue and pricing to remain stable. At the beginning of FY14, the management abstained from providing any EPS guidance due to volatile business & pricing environment. In our view, Infosys is likely to exceed its FY14 revised Dollar Revenue guidance and achieve ~13% growth.

Strong balance sheet & higher Return Ratios
Its balance sheet remained very strong with low Debtor Days (62 days) and High Net Cash in excess of US$ 4.3 bn (Rs.269 bn) as on 30th Sept, 2013. The return on investment has been encouraging with its FY13 RoCE & RoE in excess of 36% & 27% respectively. Going forward, the better utilization of its idle cash in high growth service offerings or markets could further improve its return on investments. Although the current valuation & cash position provide some respite to shareholders, the upside in the stock is possible only on some visible improvement in its operational performance and its ability to utilize its cash in acquisitions.

OUTLOOK & VALUATION

Considering its Q2FY14 performance and business outlook, we have slightly upgraded our FY14E & FY15E INR Revenue & earnings estimates. Going forward, we expect its FY14E & FY15E Revenues to grow by 25.8% & 15.1% respectively, while expect its APAT to grow by 10.9% in FY14E & by 10% in FY15E.

We also increase the valuation multiple to 17.5x its FY15E earnings (its historical average forward P/E). The CMP of Rs.3,274 discounts its FY14E & FY15E Earnings of Rs.182.6 & Rs.200.8 by 17.9x & 16.3x respectively. We maintain our 'HOLD' rating on the stock with increased price target of Rs.3,515.

Source : Equity Bulls

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