Infosys Ltd INFO IN; INFY.BO

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1 IT India 2QF16 result review BUY Current price (12 Oct) Rs 1,123 Target price Rs 1,350 Upside/(downside) % 20 Earning estimate Revised Market data Mkt capitalisation Rs bn Average daily vol ' week H/L Rs 1219 / Shares O/S mn Free float mn Promotor holding % 13.1 Foreign holding % 41.0 Face value Rs 5.0 Price performance (%) 1m 3m 6m 1yr Nifty (abs) 4.5 (2.6) (7.3) 3.6 Stock (abs) Relative to Index (1.6) Performance Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Infosys (LHS) Source: Bloomberg, SSLe Dipesh Mehta dipesh.mehta@sbicapsec.com (%) Rel. to CNXIT (RHS) INFO IN; INFY.BO Q2 performance beats expectations; upgrade to BUY Institutional Equity Research October 12, 2015 Infosys 2QF16 results came ahead of SSLe. Revenues grew 6.0% QoQ to US$2,392mn (6.9% in constant currency; SSLe: US$2,334mn). Revenues included one-time early termination fees (US$23mn) from a client due to termination of a contract. Excluding one-time termination fees, revenues grew 5.0% QoQ. IT Services revenues grew 6.3% QoQ, with its volumes and realizations increasing 3.7% and 2.6% QoQ, respectively. EBITM improved 150bps QoQ to 25.5% on the back of rupee depreciation (70bps), higher utilization and operating efficiencies. Net profits grew 12.1% QoQ to Rs33,980mn (SSLe: Rs32,531mn). The company retained its F16 guidance of 10 12% in constant currency. We have fine-tuned our estimates to factorin H1 performance and change in rupee assumptions. Considering strong performance in H1, healthy deal wins and ~4% correction in stock price today, we upgrade our rating on the stock to BUY with a revised target price of Rs1,350 at 19x Sept 17 earnings (earlier Rs1,225). Consistency in performance will be the key for stock price performance in our view. Management reiterated that company is well on track to meet or beat industry growth in F17: Infosys has retained its constant currency revenue growth guidance of 10 12%, however, it lowered its US$ revenue growth guidance to % (earlier %) for F16e. Guidance implies -1.7% to 0.8% CQGR over Q3 Q4 after adjusting for one-off revenues in Q2. After reporting strong growth momentum in H1, subdued H2 outlook disappointed. Management attributed weak H2 expectations to a) some client specific headwinds, b) softness in Insurance, c) likely higher furloughs in Banking and another round of price renegotiations and d) project cancellation/deferment in Energy, in addition to normal seasonality. However, management remained fairly confident of reaching/exceeding industry growth rates in F17 and meeting/exceeding F16 guidance on the back of strong H1, recent deal wins, strong deal pipeline, healthy demand environment and better deal win rates. In our view, volatility in the performance observed in the past 3-4 years in H2 might also have played some role in more conservative approach. Infosys signed five large deals in 2QF16, with a TCV of US$983mn. Top-25 clients reported 7.9% QoQ growth in constant currency. The company has maintained its target EBITM in the 24 26% range for F16e. Earnings call takeaways: a) Outstanding hedges stand at US$990mn, b) quarterly annualized attrition is 19.9% vs. 19.2% QoQ and 24.8% YoY, c) DSO decreased to 64 from 68 days QoQ, d) ETR is expected to be 29-30% for F16e due to the rise in statutory taxes and some SEZs moving from 100% to 50% tax exemptions and e) plan to make ~20,000 campus offers for F17. Valuation: Infosys currently trades at 19.4x/16.9x/14.9x at F16e/F17e/F18e EPS. We stay positive on the stock and prefer Infosys over other Tier-1 stocks. Infosys reported an overall broad-based strong performance in H1. In our view, weak H2 guidance is more attributable to industry specific factors than company specific issues and conservative approach post volatility in the performance observed in the past 3-4 years in H2. Considering strong performance in H1, healthy deal wins and ~4% correction in stock price today, we upgrade our rating to BUY with a revised target price of Rs1,350 at 19x Sept 17 earnings. Financial summary Y/E Mar (Rsmn) F14 F15 F16e F17e F18e Net sales 5,01,330 5,33,190 6,15,165 6,96,354 7,79,734 growth (%) EBITDA margin (%) Adjusted net profit 1,08,670 1,23,290 1,32,783 1,52,976 1,72,606 EPS growth (%) P/E (x) EV/EBITDA (x) Dividend yield (%) RoE (%) RoCE (%) SBICAP Research on Bloomberg SBICAP <GO> Please refer to our disclaimer given at the last page.

2 IT services volume grew 3.7% QoQ (onsite/offshore 3.5%/3.7%); revenue productivity grew 2.6% QoQ (3.4% on cc). Excluding one-time revenue of US$23mn, revenue productivity grew 1.5% QoQ (2.4% on constant currency) Forex gain of Rs520mn vs. loss of Rs250mn QoQ Quarterly financials Particular (Rsmn) 2QF16 1QF16 QoQ (%) 2QF15 YoY (%) 2QF16e Var. (%) Revenues (US$ mn) 2,392 2, , , Revenues 156, , , , Cost of services 93,660 88,100 79,100 SG&A expenses 19,180 17,840 16,580 EBITDA 43,510 37, , , EBITDAM (%) Depreciation & amorti. 3,580 3,130 2,910 EBIT 39,930 34, , , EBITM (%) Other income 7,930 7,580 8,770 Interest expenses Extraordinary/excep PBT 47,860 42, , , PBTM (%) Tax expenses 13,870 11,750 12,640 ETR (%) PAT 33,990 30, , , Share in associate's pro (10) Net profit reported 33,980 30,300 30,960 32,531 Non-recurring items Net profit 33,980 30, , , NPM (%) EPS We have fine-tuned our estimates to factor-in H1 performance, change in rupee assumptions and higher ETR Change in estimates (Rsmn) Revised Old Change (%) F16e F17e F18e F16e F17e F18e F16e F17e F18e Net sales 615, , , , , NA EBITDA 169, , , , , NA EBITDAM (%) bps 0 bps NA Adj. PAT 132, , , , , NA EPS NA Source: SSLe Key assumptions Y/E Mar F16e F17e F18e US$ revenue growth (%) We have upped our Rs/US$ assumption to Rs65.0 for the forecast period US$/Rs Cost of services (% of revenue) SG&A expenses (% of revenue) EBITDA margin (%) ETR (%) Dividend (Rs per share) Source: SSLe dipesh.mehta@sbicapsec.com October 12,

3 Revenue by service offering Particulars As a % of revenue QoQ YoY 2QF16 1QF16 2QF15 (%) (%) Business IT Services Application Development (5.5) Application Maintenance Infrastructure Management Services Testing Services Business Process Management Product Engineering Services (0.0) 5.5 Others Consulting & Systems Integration Products, Platforms and Solutions Products (7.2) 4.9 BPM Platform (9.4) Others Total In constant currency, FSI, Manufacturing, RCL and ECS grew 6.4%, 5.8%, 8.2% and 7.8% QoQ, respectively In constant currency, North America, Europe, India and RoW grew 6.2%, 8.3%, 12.1% and 7.1%, respectively Revenue by industry Particulars As a % of revenues QoQ YoY 2QF16 1QF16 2QF15 (%) (%) FSI Banking & financial services Insurance (1.0) 1.4 Manufacturing RCL Retail & CPG Transport & Logistics Life Sciences Healthcare ECS (0.3) Energy & Utilities (7.1) Communication and Services (0.3) (3.5) Others Total Revenues by geography Particulars As a % of revenue QoQ YoY 2QF16 1QF16 2QF15 (%) (%) North America Europe India Rest of the World (0.1) 1.6 Total dipesh.mehta@sbicapsec.com October 12,

4 Revenues from top client grew 6.0% QoQ on the back of 10.5% growth in Q1 Top-10 clients grew 5.1% QoQ on back of 5.9% growth in Q1 Clients data Clients 2QF16 1QF16 2QF15 Number of clients Added during the quarter Client concentration (%) Top client Top-5 clients Top-10 clients Repeat business No. of million dollar clients (on LTM basis) US$1mn-10mn US$10mn-25mn US$25mn-50mn US$50mn-100mn US$100mn year forward P/E chart 1,600 1,200 Infosys currently trades at 16.9x/14.9x F17e/F18e EPS Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Price 10x 13x 16x 19x 22x 25x We value stock at 19x Sept 17e EPS Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Source: Bloomberg, SSLe P/E Mean +1 SD -1 SD +2 SD -2 SD dipesh.mehta@sbicapsec.com October 12,

5 Financials Income Statement Balance Sheet Y/E Mar (Rsmn) F14 F15 F16e F17e F18e Y/E Mar (Rsmn) F14 F15 F16e F17e F18e Net sales 501, , , , ,734 Cash & Bank balances 259, , , , ,328 growth (%) Other Current assets 140, , , , ,354 Operating expenses 364, , , , ,002 Investments 43,080 23,120 46,520 46,520 46,520 EBITDA 136, , , , ,731 growth (%) Net fixed assets 78,870 91, , , ,108 Depreciation &amort. 13,740 10,690 13,810 15,970 17,964 Goodwill & intangible assets 24,990 37,290 43,524 41,946 40,489 EBIT 122, , , , ,768 Other non-current assets 23,980 48,640 25,560 27,060 28,560 Other income 26,690 34,270 30,712 35,338 40,340 Total assets 570, , , , ,359 Interest paid Extraordinary/exceptional (2,190) Current liabilities 91, , , , ,725 PBT 147, , , , ,108 Borrowings Tax expenses 40,620 49,290 53,596 62,483 70,501 Other non-current liabilities 3,870 2,060 2,060 2,060 2,060 Effective tax rate (%) Total liabilities 95, , , , ,785 Net profit 106, , , , ,606 Minority interest Share capital 2,860 5,720 5,720 5,720 5,720 Reported Net profit 106, , , , ,606 Reserves & surplus 472, , , , ,854 Non-recurring items (2,190) Shareholders' funds 475, , , , ,574 Adjusted Net profit 108, , , , ,606 Minority interest growth (%) Total equity & liabilities 570, , , , ,359 Key Financials ratios Cash Flow Statement Y/E Mar F14 F15 F16e F17e F18e Y/E Mar (Rsmn) F14 F15 F16e F17e F18e Profitability and return ratios (%) Pre-tax profit 147, , , , ,108 EBITDAM Depreciation 13,740 10,690 13,810 15,970 17,964 EBITM Chg in working capital 390 (11,310) (20,585) (13,128) (12,707) NPM Total tax paid (38,780) (67,510) (53,596) (62,483) (70,501) RoE Other operating activities (580) 3, RoCE Operating CF 121, , , , ,864 RoIC Capital expenditure (27,450) (35,290) (34,040) (25,630) (26,130) Per share data Chg in investments (22,350) 22, (1,500) (1,500) O/s shares (mn) Other investing activities (230) (80) EPS Investing CF (50,030) (12,790) (33,850) (27,130) (27,630) FDEPS FCF 94,420 72,230 91, , ,734 CEPS BV Equity raised/(repaid) DPS Debt raised/(repaid) Dividend (incl. tax) (31,430) (49,350) (67,183) (73,901) (87,338) Valuation ratios (x) Other financing activities 770 (1,210) PE Financing CF (30,660) (50,560) (67,183) (73,901) (87,338) P/BV EV/EBITDA Net chg in cash & bank bal. 41,180 44,170 24,974 54,787 62,896 EV/Sales Closing cash & bank bal 259, , , , ,328 Other key ratios D/E (x) DSO (days) Du Pont Analysis - RoE NPM (%) Asset turnover (x) Equity Multiplier (x) RoE (%) dipesh.mehta@sbicapsec.com October 12,

6 Recommendation History Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Source: Bloomberg, SSLe Dec-13 BUY HOLD SELL Stock Price Target Price Feb-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Oct-15 Date Stock Price TP Rec. 20-Feb HOLD 5-Apr HOLD 12-Apr HOLD 12-Jul HOLD 23-Sep HOLD 11-Oct HOLD 31-Oct HOLD 10-Jan ,031 BUY 15-Apr BUY 28-May HOLD 7-Jul HOLD 11-Jul HOLD 7-Oct HOLD 10-Oct ,075 BUY 5-Dec-14 1,035 1,190 BUY 5-Jan ,190 BUY 9-Jan-15 1,037 1,190 BUY 16-Feb-15 1,140 1,190 BUY 6-Apr-15 1,089 1,190 BUY 24-Apr ,150 BUY 3-Jul ,150 BUY 21-Jul-15 1,116 1,225 HOLD 12-Oct-15 1,123 1,350 BUY SBICAP Securities Limited (CIN): U65999MH2005PLC Research Analyst Registration No INH SEBI Registration No.: NSE Capital Market: INB NSE Derivatives: INF BSE Capital Market: INB Currency Derivatives: INE CDSL: IN DP CDSL IRDA/IR2/2014/241 Corporate Office: Marathon Futurex, A & B Wing, 12th Floor, N. M. Joshi Marg, Lower Parel, Mumbai Tel.: /01 Fax: sbicapresearch@sbicapsec.com KEY TO INVESTMENT RATINGS (w.e.f. February 2013) Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -10 to 15 percentage points); 3=SELL (expected to give absolute returns less then -10 percentage points) Analyst Certification DISCLOSURES & DISCLAIMERS The views expressed in this research report ( Report ) accurately reflect the personal views of the research analysts ( Analysts ) employed by SBICAP Securities Limited (SSL) about any and all of the subject issuer(s) or company(ies) or securities. This report has been prepared based upon information available to the public and sources, believed to be reliable. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. The Analysts engaged in preparation of this Report or his/her relative:- (a) do not have any financial interests in the subject company mentioned in this Report; (b) do not own 1% or more of the equity securities of the subject company mentioned in the report as of the last day of the month preceding the publication of the research report; (c) do not have any material conflict of interest at the time of publication of the Report. The Analysts engaged in preparation of this Report:- (a) have not received any compensation from the subject company in the past twelve months; (b) have not managed or co-managed public offering of securities for the subject company in the past twelve months; (c) have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (d) have not received any compensation for products orservices other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months; (e) have not received any compensation or other benefits from the subjectcompany or third party in connection with the Report; (f) has not served as an officer, director or employee of the subject company; and (g) are not engaged in market making activity for the subject company. Name Qualification Designation Dipesh Mehta BE (IT), MMS (Finance) Sr. Analyst dipesh.mehta@sbicapsec.com October 12,

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