Recommendation HOLD Results in line with our expectations CMP (15/10/2010) Rs Target Rs Sector

Transcription

1 Recommendation HOLD Results in line with our expectations CMP (15/10/2010) Rs Target Rs Sector IT & Software BSE Code NSE Code Bloomberg Code Market Cap (Rs. cr) Free Float (%) 52- wk HI/Lo Avg. volume BSE (Quarterly) Face Value Dividend (FY 2010) Shares o/s (No.) INFOSYSTCH INFO IN 1,84,427 84% 3494/ Rs % Crs Relative Performance 1Mth 3Mth 1 Yr Infosys 2.0% 0.9% 24.1% Sensex -2.6% -6.4% 10.1% % 20% 0% -20% 12-Jan 8-Mar 3-May 23-Jun 13-Aug 6-Oct 29-Nov Infosys Shareholding Pattern as of 30/09/2010 SENSEX Promoters Holding 16.04% Institutional (Incl. FII) 43.73% Corporate Bodies 6.38% Public & others 33.85% Ashish Khetan, Research Analyst ( ) ashish.khetan@nirmalbang.com Year Net Sales Rs Crs Growth % EBITDA Rs Crs Infosys Q3 FY11 revenues grew 5.9% QoQ to US$1585 mn despite being a seasonally weak quarter. In INR terms, Infosys revenues grew 2.3% QoQ to Rs.7106 Crs beating Management guidance of Rs Revenue was in line with our estimates of Rs.7090 Crs. However, Q3 FY11 revenues fell short of market expectations of Rs.72 Crs. EBITDA margin was flat at 33.3% (-7 bps QoQ) in Q3 FY11. PAT increased 2.5% QoQ to Rs.1780 in Q3 FY11 reflecting the growth in top-line. PAT was in line with our estimate. Particulars (Rs. Crs) NBS estimate Actual Variation Revenues 7,090 7, % PAT 1,776 1, % Volumes growth of 3.1% QoQ in Q3 FY11 is impressive considering that it was a seasonally weak quarter. Revenue from Products grew around 16% QoQ in US$ terms in Q3 FY11. Pricing increased by approximately 1.6% in dollar terms in Q3 FY11. Gross addition of employees stood at 11,067 in Q3 FY11 as compared to 14,264 in Q2 FY11. Company has maintained its target to hire,000 employees in FY 2011 to manage the increased attrition rate. Revenue share of fixed price contracts increased by 120 bps QoQ to 41.2% and the utilization rate declined to 72.6% in Q3 FY11 from 74.3% in Q2 FY11. Valuation and Recommendation At the current price of Rs.3212, Infosys is trading at a PE of 26.39x FY 2011 EPS & 22.03x on FY 2012 estimated EPS. Based on our estimated EPS of Rs for FY 2012 and our target PE multiple of 22.0x we arrive at a target price of Rs.3208 per share for Infosys. Considering the improved scenario for the IT sector, we recommend to HOLD the stock. Margin % PAT Rs Crs EPS PE P/BV ROE % FY 2009A % % % FY 2010A % % % FY 2011E % % % FY 2012E % % %

2 Quarterly Performance Infosys Q3 FY11 revenues grew 2.3% QoQ to Rs.7106 Crs above the management guidance. The growth in top-line in Q3 FY11 was driven by volume growth (3.1% QoQ) and a 1.6% increase in pricing. EBITDA grew 2.1% QoQ to Rs.2363 Crs in Q3 FY11 reflecting the growth in top-line partially offset by 2.5% growth in cost of sales owing to higher employee expenses. EBITDA margin was flat at 33.3% (-7 bps QoQ) in Q3 FY11. Net margin also remained flat at 25.0%. Infosys reported a diluted EPS of Rs in Q3 FY11 which was higher than Management s guidance. Consolidated in Rs Crs Q3 FY11 Q2 FY11 QoQ Q3 YoY Income 7,106 6, % 5, % Software development expenses 3,847 3, % 3, % Gross profit 3,259 3, % 2, % GP Margin 45.9% 46.0% -10 bps 47.6% -172 bps SG&A Expenses % % EBITDA 2,363 2, % 2, % EBITDA Margin 33.3% 33.3% -7 bps 35.5% -225 bps Interest Depreciation and amortization % % Op profit after Int & Dep 2,147 2, % 1, % Other income % % Provision for investments Profi t before tax (PBT) 2,437 2, % 2, % Provision for taxation % % Net profit after tax (PAT) 1,780 1, % 1, % Exceptional items net of taxes Adjusted PAT 1,780 1, % 1, % PAT Margin 25.0% 25.0% 5 bps 27.2% -211 bps Adjusted EPS Diluted % % Source: Company data, Nirmal Bang Research

3 As per IFRS GAAP Consolidated figs in US$ mn Q3 FY11 Q2 FY11 QoQ Q3 YoY Revenue 1,585 1, % 1, % Gross Profit % % Margin 42.8% 42.8% -1 bps 43.2% -34 bps Operating Profit % % Margin 30.2% 30.2% 1 bps 31.0% -79 bps PBT % % PAT % % Margin 25.0% 25.0% 5 bps 27.1% -206 bps Diluted EPS % % Source: Company data, Nirmal Bang Research In US dollar terms revenues increased 5.9% QoQ which lower than the growth witnessed in Q2 FY11 being a seasonally weaker quarter. EBITDA and PAT margin remained flat and the diluted EPS stood at US$ Guidance Management has increased its guidance marginally for top-line growth from 24-25% to around % for FY 2011 in US dollar terms. This is primarily due to improving demand scenario for offshore IT spending. In rupee terms, management has guided for an annual revenue growth of % for FY 2011 compared to earlier guidance of %. The company is conservative on its revenue guidance in rupee terms because of the currency volatility witnessed over the past couple of months. The revised rupee guidance is based on the exchange rate of 1 US$ = Rs Yrly Guidance Rs.in Cr US $ million FY 2011 Earlier Revised Earlier Revised Revenue Adj.EPS Source: Company data Rs in Crs US$ mn Quarterly Q3 FY11 Q4 FY11 Var % Q3 FY11 Q4 FY11 Var % Guidance Actual Guidance Actual Guidance Revenue % % Adj.EPS % % Source: Company data

4 Aggressive hiring plans Infosys added 11,806 employees in Q3 FY11 exceeding Management guidance to add employees during the quarter. The hiring target for FY 2011 remains at,000. These aggressive hiring plans indicate that company is gearing up for the uptick in demand from developed economies. QoQ increase in Client Addition Q4 FY08 Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 Q2 Q3 Q4 Q1 FY11 Q2 FY11 Q3 FY11 The Client addition in Q3 FY11 stood at as compared to 27 in Q2 FY11. Volumes and Pricing in Q3 FY % 5.0% 0.0% -5.0% -10.0% Q3 FY09 Q4 FY09 Q1 Q2 Q3 Q4 Q1 FY11 Q2 FY11 Q3 FY11 Volume growth Inc / Dec in Pricing Volumes witnessed a growth of 3.1% QoQ which was lower than the growth of 7.2% achieved in Q2 FY11. Pricing increased by around 1.6% in dollar terms. Going ahead the company sees stronger volume growth with greater traction in financial services and retail. Management also expects the demand from telecom sector to increase in FY Pricing is expected to remain stable. This is expected to boost the top-line going forward.

5 Revision in Our estimates remain broadly unchanged for FY We have revised our sales estimates marginally upwards for FY 2012 considering the improving demand scenario and firm pricing. Consequently PAT estimate for FY 2012 are also revised marginally upwards. Previous FY 2011 Revised Variation Previous FY 2012 Revised Variation Sales 27,599 27, % 33,295 33, % PAT 6,936 6, % 8,098 8, % Valuation & Recommendation The Q3 FY11 results were subdued owing to seasonality. The company is seeing an improved traction in Manufacturing, Retail, BFSI and Energy & Utility verticals among its US clients. During the quarter, growth was led by BFSI and Manufacturing which witnessed a growth of 6% each. Revenues from telecom sector declined after a sharp jump in Q2 FY11. Going forward, Management expects the telecom sector spending will increase in Overall, outlook remains positive with growth across sectors and regions. Exchange rate volatility continues to remain a major concern. Attrition rate increased marginally in this quarter. However, the Management has indicated that attrition rate will come down in Q4 FY11 and will not hamper the top-line going growth forward. Moreover, Infosys managed to sustain the high margin in Q3 FY11 and the Management believes that the current margins are sustainable going forward despite increasing competition. At the current price of Rs.3212, Infosys is trading at a PE of 26.39x FY 2011 EPS & 22.03x on FY 2012 estimated EPS. Based on our estimated EPS of Rs for FY 2012 and our target PE multiple of 22.0x we arrive at a target price of Rs.3208 per share for Infosys. Therefore, the company looks fairly valued at current levels and doesn t offer much upside from current levels in near term. Considering the improved scenario for the IT sector, we recommend to HOLD the stock.

6 Financials Profitability (Rs. In Cr) FY09A A FY11E FY12E Financial Health (Rs. In Cr) FY09A A FY11E FY12E Revenues Share Capital % change 30.0% 4.8% 21.7% 22.0% Reserves & Surplus EBITDA Deferred Tax Liabilities % change in EBIDTA 37.4% 12.5% 13.8% 21.4% Net Worth Depreciation Total Loans Operating Income Total Liabilities Interest Net Fixed Assets Other Income Investments Extraordinary Deferred Tax Assets PBT Sundry Debtors Tax Cash & Bank PAT Loans & Advances Adj PAT C A L&A Shares o/s ( No. in Cr.) CL & P EPS Working Capital Adj EPS Misc Exp Cash EPS Total Assets Quarterly (Rs. In Cr) Mar.10 Jun.10 Sep.10 Cash Flow (Rs. In Cr) FY09A A FY11E FY12E Revenue Operating ` EBITDA Net Income Depn Change in WC Operating Income Other Adjustment Interest CF from Opeartion Other Inc Investment Extraordi nary Capex PBT Other Investment Tax Total Investment PAT Financing EPS (Rs.) Diviend Paid Performance Ratio FY09A A FY11E FY12E Share Capital PAT growth (%) 28.5% 8.2% 7.4% 19.8% Total Financing EBITDA margin (%) 33.2% 35.6% 33.3% 33.1% Net Chg. i n Cash Adj.PAT margin (%) 27.6% 28.7% 25.1% 24.7% Eff of exch diff on trans ROE (%) 37.4% 31.4% 28.0% 28.3% Cash at beginning ROIC (%) 54.1% 53.1% 52.4% 54.6% Cash at end (i ncl dep with F Valuation Ratio FY09A A FY11E FY12E Per Share Data FY09A A FY11E FY12E Price Earnings (x) Reported EPS Price / Book Value (x) Adjusted EPS EV / Sales BV per share EV / EBIDTA Cash per share Dividend Yield 1.59% 1.16% 1.63% 1.30% Dividend per share Source: Nirmal Bang Research, Company data

7 NOTE Disclaimer This Document has been prepared by Nirmal Bang Research (Nirmal Bang Securities PVT LTD).The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.