Reduce Infosys Technologies - Elara Capital

• Q1FY11 Update | IT Services
• Infosys Technologies
• Rating : Reduce
• Target Price : INR2,706
• Downside : 3%
• CMP : INR2,797 (as on 13 July 2010)

Too much ado about a 'ho-hum' quarter

Quarter misses an optimistic consensus

Infosys has come in with a 4.3% QoQ topline growth led by BFSI, energy and utilities, and retail (8.7%, 8.4% and 6.4% growth QoQ). EBITDA margins have contracted sharply (236bps QoQ) as the full impact of the wage hike (300bps) flowed through into the margins. Volumes have gone up by 7.6% QoQ while pricing was down 0.6% QoQ in constant currency terms. While INR margins and EPS were marginally below our estimates for the quarter, we were on target about the USD revenue numbers (coming in at USD1,358mn vs our estimate of USD1,360mn).

Changes to guidance on near term visibility

The FY11 USD guidance has been upped from the 16-18% YoY growth band to 19 -21%. On the INR EPS, EPS guidance has been hiked to INR 116.7 from INR 111.3. Guidance on gross additions has been raised from 30,000 to 36,000 (2000 of the 6000 additions is likely to take care of the increased attrition). We believe that the increase in USD guidance is being led by the deal pipeline and ramp-ups that Infosys has seen in new projects. We note that the effort mix this quarter has shifted onshore by 200bps QoQ.

Adjustments to our estimates largely revolve around currency

While the Infosys guidance is at an exchange rate of INR46.45, we change our numbers to an exchange rate of INR45.5 for FY11 and FY12. A part of the change is also led by the incorporation of a marginal uptick in net additions to headcount.

Reiterating our Reduce call, target price

We reiterate our Reduce call on uncertainty on the pricing front based on which particular projects ramp up in quarters ahead (legacy impact of renegotiations in certain specific deals last CY). Stock is currently valued at an expensive 22.9x our current FY11 EPS estimates.

Source : Equity Bulls

Keywords