STOCK UPDATE - Infosys - Management interaction note - Sharekhan

Infosys
Cluster: Evergreen
Recommendation: Hold
Price target: Rs2,772
Current market price: Rs2,667

Demand environment: decision making getting further delayed

The demand environment has become more uncertain in the last two months as compared with October 2011 owing to the escalating macro-economic uncertainties. Clients are uncertain about spending which is leading to delays in decision making, thereby slowing down the new business. Nevertheless, the company has not seen any deal cancellation. There is visibility for the next quarter (Q4FY2012). However, the demand scenario for FY2013 remains uncertain. Clients are beginning to be watchful about the discretionary spends, leading to higher impact on these spends. Discretionary spends contribute about 31% of the company's revenues. On the pricing front, the pricing environment remains stable with no instances of pricing cuts seen.

CY2012 IT budgets: Likely to remain flat to marginally down

The management expects the CY2012 IT budget would be finalised by the end of January or the start of February 2012. Its latest interaction with the top 100 clients has been mixed with some clients indicating a higher spend and some indicating a flat budget, and some indicating a fall in the budget. Overall, the IT budgets seem to be flat to marginally down. However, a clearer picture would emerge in January - February 2012 when the budgets are finalised. Also, even though the IT spend would be finalised, the worsening macro-economic environment might further affect the spend/budget ratio if the situation does not improve in the coming months as clients might refrain from spending the budgets.

Q3FY2012 expectations: revenue growth close to lower end of guidance, trigger downward revision in FY2012 dollar terms revenue guidance

The management expects the dollar terms revenue growth rate in Q3FY2012 to be close to the lower end of its revenue growth guidance of 3.2-5.4%. The slower growth would mean a higher range for the Q4FY2012 revenue growth (in $ terms) at 3.3-9.9%. The higher range may lead the company to lower the upper end of its full-year guidance. Currently the FY2012 revenue guidance stands at $7.08-7.2 billion, up 17.1-19.1% over FY2011. A revenue growth closer to the lower end of the Q3FY2012 growth guidance of 3.2-5.4% despite increasing working days during the quarter would also be a function of lower than anticipated business volume during the quarter.

Valuation

We reiterate our preference for TCS over Infosys owing to better predictability and stability of growth in TCS as compared with Infosys in the coming quarters. We expect the weakness in Infosys' financials will be more pronounced in FY2013 when the rupee benefits would fade away and the actual operational performance will come into foray. We expect TCS to report a much stronger operational performance in FY2013, with better visibility of its volume growth. At the current market price of Rs2,665, the Infosys stock trades at 16.9x FY2013 earnings estimate. We maintain our Hold recommendation on the stock with a price target of Rs2,772.

Source : Equity Bulls

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