Infosys - USD Revenue growth remained muted but better than its guidance - Sushil Finance

During Q3FY14, Infosys delivered muted growth as its USD Revenue grew 1.6% QoQ to 2,100 mn which was slightly below the street's expectations of ~2% QoQ growth. The contribution from Lodestone continued to be impressive growing 21.6% QoQ to USD 119 mn. While in constant currency its USD Revenues grew 1.2% QoQ led by blended volume growth of 0.7% QoQ and price increase of 0.7% QoQ (2.2% offshore, 2.1% onsite). However, INR Revenues grew 0.5% QoQ to Rs. 130,260 mn, mainly due to 1.2% appreciation in average INR/USD rate. The growth in Q3 was driven by Europe (5.5%) & ROW (4.9%) regions led by RCL (3.4%) & FSI (2%) verticals.

EBIT Margins expand on cost optimization & offshore shift

Its EBIT for Q3FY14 grew 6.6% QoQ to Rs. 32,590 mn, while the EBIT margins expanded 140 bps QoQ to 25%, mainly due to benefits of improved utilization (74.1 vs. 73.7%), & change in Revenue mix towards offshore (75.5% vs. 74.4%) which was partially offset by INR appreciation. With higher other income (Rs. 7,300 mn) on exchange gain (1190 mn vs. loss of 870 mn in Q2), its APAT grew by 9.5% QoQ to Rs. 28,750 mn. Going forward, although the company would continue to invest in its businesses, it is optimistic of achieving 25-26% EBIT margins with its near term focus on cost optimization & improvement in utilization. However, we expect Infosys to deliver ~24% & 22% EBIT margins during FY14E & FY15E respectively. The company won 5-6 large deals of TCV of ~USD 500 mn (3 in Europe, 2 in US) including 2 BFSI deals, while deal pipeline remained stable.

FY14 Dollar Revenue growth Guidance revised to 11.5-12%

In view of its decent 9MFY14 performance, the management revised its USD Revenue growth guidance to 11.5-12% (12.4% to 12.9% in CC) given the fact that Q4FY14 to remain softer in terms of business, primarily due to less number of working days in February & finalization of clients' budget on their annual IT spending. The management was expected to revise its growth guidance and it was in line with the expectation of 11-12%. The company expects the deal momentum to continue and pricing to remain stable. In our view, Infosys is likely to achieve the upper-end of its FY14 USD Revenue growth guidance.

Realigned business portfolios under leadership of two presidents reporting to CEO

Infosys has witnessed several top level exits in recent past since Mr. Murthy rejoined as executive chairman. These senior level exits have been a major concern for the shareholders as it could have an impact on engagements with clients. However, the management clarified that over the years, Infosys has developed very strong leg of leaderships and having multi level engagements with its clients, and hence these exits will not have any impact on its businesses. Effective 1st April 2014 the company has restructured its businesses into eight separate business units which will be led by eight respective leaders, who will directly repot to the newly appointed presidents Mr. Pravin Rao (President- Global Delivery & innovation) and Mr. B. G. Srinivas (president - Global markets). With this new structure, the executive council of Infosys will cease to exist.

OUTLOOK & VALUATION

In view of its 9MFY14 performance & current business outlook, we have slightly reduced our FY14E Revenue estimates. However, with better than expected EBIT margins we have upgraded FY14E earnings estimates. We have also upgraded our FY15E Revenues & earnings estimates. Going forward, we expect its FY14E & FY15E Revenues to grow by 24.8% & 18.1% respectively, while expect its APAT to grow by 12.8% in FY14E & by 10% in FY15E.

With strong balance sheet (Net cash of USD 4.4 bn), low Debtor Days (65 days) and High Return Ratios (RoCE ~35%, RoE ~25%), along with FY15E Revenue growth expected to be better than industry growth, we increase our valuation multiple to 19x its FY15E earnings. The CMP of Rs. 3,551 discounts its FY14E & FY15E Earnings of Rs.185.8 & Rs.204.4 by 19.1x & 17.4x respectively. We maintain our 'HOLD' rating on the stock with increased price target of Rs. 3,885.

Source : Equity Bulls

Keywords