Previous Recommendation: Neutral QUARTERLY PERFORMANCE (INDIAN GAAP)

Transcription

1 Results Update SECTOR: INFORMATION TECHNOLOGY Infosys Technologies STOCK INFO. BSE Sensex: 13,504 S&P CNX: 4,004 BLOOMBERG INFO IN REUTERS CODE INFY.BO Previous Recommendation: Neutral Neutral Rs1,727 Equity Shares (m) Week Range 1,876/1,040 1,6,12 Rel. Perf. (%) 8/1/-1 M.Cap. (Rs b) M.Cap. (US$ b) 20.3 YEAR NET SALES PAT EPS EPS P/E P/BV ROE ROCE EV/ EV/ END (RS M) (RS M) (RS) GR. (%) (X) (X) (%) (%) SALES EBITDA 3/08A 166,920 45, /09A 216,930 58, /10E 217,093 56, /11E 234,477 58, Infosys results were significantly better than our expectations and much ahead of its own guidance. Revenues were flat QoQ in dollar terms, while PAT at Rs15.3b was higher than our estimate of Rs13.6b. Despite a strong, Infosys has kept its guidance of US$ constant currency revenues for FY10 unchanged at the top end at 3% YoY decline. The guidance of revenue decline in 2QFY10, implied CQGR of 0-0.2% for 3Q and 4QFY10, and deterioration in the Manufacturing and Retail verticals belie hopes of a back-ended improvement. Results better than expected: US$ revenues for were flat QoQ (v/s our estimate of 4% QoQ decline) at US$1,122m, against a guidance of US$1,060m-1,080m. EBITDA margin at 34.1% was up 50bp QoQ, on rationalization of employee cost. Infosys PAT at Rs15.3b, was down 5% QoQ, much better than our estimate of Rs13.6b due to better than expected margins. Guidance sounds caution, suggests no back-ended improvement: Infosys kept the upper of guidance unchanged, despite higher revenues in. The quarterly and annual guidance implies flat QoQ revenue growth for 3Q and 4QFY10 as against earlier CQGR expectations of 2.4% to 4.1% for 3Q and 4QFY10, respectively. Pricing stability positive, reduced headcount indicates aggressive cost focus: The company reduced its pricing decline guidance from 6-6.5% to 5%. The stability in pricing is positive, as compared to declines of ~2% in 3Q and in CC terms. Infosys unprecedented headcount reduction signifies focus on rationalizing costs. Valuation and view: We are revising our FY10 EPS estimate upwards by 2% and keeping our FY11 EPS estimate intact. We believe the company s guidance is realistic and not conservative and valuations of 17.4x FY10E EPS and 17.1x FY11E EPS are expensive. We maintain Neutral, with a target price of Rs1,615 (16x FY11E earnings). QUARTERLY PERFORMANCE (INDIAN GAAP) (Rs Million) Y/E MARCH FY09 FY10 FY09 FY10E 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE Revenues 48,540 54,180 57,860 56,350 54,720 53,106 53,985 55, , ,093 Q-o-Q Change (%) Direct Expenses 27,540 28,910 30,750 30,450 29,150 28,808 29,314 29, , ,160 SG&A 6,210 7,330 6,800 6,990 6,890 7,063 7,288 7,463 27,330 28,704 Operating Profit 14,790 17,940 20,310 18,910 18,680 17,235 17,383 17,932 71,950 71,229 Margins (%) Other Income 1, ,520 2,690 1,897 2,010 2,093 4,730 8,690 Depreciation 1,690 1,770 1,870 2,280 2,220 2,189 2,161 2,134 7,610 8,703 PBT bef. Extra-ordinary 14,270 16,830 18,840 19,150 19,150 16,943 17,231 17,891 69,070 71,215 Provision for Tax 1,560 2,510 3,030 3,170 3,880 3,389 3,446 3,578 10,270 14,293 Rate (%) PAT before EO 12,710 14,320 15,810 15,980 15,270 13,554 13,785 14,313 58,800 56,922 Q-o-Q Change (%) Extra-ordinary Items ,080 0 PAT aft. Minority and EO 13,020 14,320 16,430 16,130 15,270 13,554 13,785 14,313 59,880 56,922 Q-o-Q Change (%) Diluted EPS E: MOSL Estimates Ashwin Mehta (Ashwin.Mehta@MotilalOswal.com); Tel: / Vihang Naik (Vihang.Naik@MotilalOswal.com)

2 Infosys' results were significantly better than our expectations and much ahead of its own guidance. Revenues were flat QoQ in dollar terms, while PAT at Rs15.3b was higher than our estimate of Rs13.6b. Despite a strong, Infosys has kept its guidance of US$ constant currency revenues for FY10 unchanged at the top end at 3% YoY decline. The guidance of revenue decline in 2QFY10, implied CQGR of 0-0.2% for 3Q and 4QFY10, and deterioration in the manufacturing and retail verticals belie hopes of a back-ended improvement. Among the positives are: [1] revised pricing guidance of 5% decline from 6-6.5% decline earlier, [2] expert cost management through onsite rationalization, and [3] reduction in EBIDTA margin decline estimate to 150bp from 300bp earlier. We are revising our FY10 EPS estimate upwards by 2%, while keeping our FY11 EPS estimate intact. Our revised estimates incorporate the following: [1] change in currency assumptions: exchange rate of Rs47.8/US$ for FY10 and Rs46/US$ for FY11, v/s Rs47.4/ US$ and Rs45/US$, earlier, [2] increase in taxation to 20% in FY10 and 24% in FY11 from 16.5% and 21%, respectively, [3] toning down of pricing assumptions to 5% decline from 7% decline earlier, and [4] impact of results. We believe the company's guidance is realistic and not conservative. Valuations of 17.4x FY10E EPS and 17.1x FY11E EPS are expensive. We maintain Neutral, with a target price of Rs1,615 (16x FY11E earnings). Results better than expected US$ revenues for were flat QoQ (v/s our estimate of 4% QoQ decline) at US$1,122m, against a guidance of US$1,060m-1,080m. US$ revenues in constant currency terms declined 1.9% QoQ (up 1% QoQ in reported currency). Onsite volumes declined by 2.1% QoQ, while offshore volumes declined by 0.6% QoQ. Onsite billing rates improved by 0.6% QoQ, while offshore billing rates declined by 1.9%. Rupee revenues declined 3% to Rs54.7b v/s a guidance of Rs53.8b-54.8b. EBITDA margin at 34.1% was up 50bp QoQ. The improvement in EBITDA margin was due to rationalization of employee cost. Headcount reduced by 945 employees to 103,905. Operating margins were also aided by lower reduction in utilization (60bp QoQ) and managing SG&A expenses, which were up by just 20bp QoQ. Restricting realization decline also helped manage margins. Infosys reported forex gain of Rs310m. The company holds hedges worth US$598m. Effective tax rates increased to 20.3% from 16.6% in, on account of higher onsite profitability and growth in exempted STPI units. Infosys' PAT at Rs15.3b, was down 5% QoQ, much better than our estimate of Rs13.6b due to better than expected margins. Guidance sounds caution, suggests no back-ended improvement Infosys raised the lower end of its full-year revenue guidance from US$4.35b to US$4.45b, while keeping the upper end unchanged. The company has revised its INR guidance to reflect changes in currency, tax and margin assumptions. The quarterly and annual guidance implies flat QoQ revenue growth for 3Q and 4QFY10 as against earlier CQGR expectations of 2.4% to 4.1%, respectively. 2QFY10 guidance factors in 1.3% benefit due to crosscurrency rate impact, implying de-growth of 2.4% to -0.6% in CC terms, after 2% degrowth in CC terms in. Lack of sequential improvement in revenues indicates management's caution in business gaining traction in 2HFY10. Also, in absolute terms as 2

3 per guidance, 2HFY10 revenues will be lower by US$74m (1.5% of FY09 revenues) at the higher end of its guidance. EBITDA margin decline expectation has been reduced from 300bp to 150bp in FY10. PERFORMANCE AND GUIDANCE GUIDANCE 1FY10 2QFY10 FY10-NEW FY10-OLD INR Revenue (b) Growth (%) to to to 5.7 INR EPS US$ Revenue (m) Growth (%) to to to -3.1 USD$ EPS Source: Compan/MOSL US$ REVENUE GUIDANCE CQGR (US$M) 2QFY10 3QFY10 4QFY10 FY10 Lower End 1,122 1,110 1,109 1,109 4,450 QoQ Growth (%) Higher End 1,122 1,130 1,133 1,135 4,520 QoQ Growth (%) Source: Company/MOSL BFSI stabilizes, Telecom growth still subdued, Manufacturing and Retail disappoint BFSI revenues declined 1.5% QoQ (in CC terms) in after declining 9% QoQ in. We believe that the stabilization in BFSI revenues is a positive, indicating that the panic situation in has subsided and clients are not curtailing spends in the segment. Telecom revenues declined by 4.6% in (in CC terms) as compared to 1.2% decline in. Key growing verticals like Manufacturing and Retail declined by 2.2% and 3.1% in CC terms respectively, which is a negative. IMS, the only consistently growing segment for Infosys and the industry, declined by 5.6% QoQ, continuation in this trend at other companies could be negative. We believe that for Indian IT companies to show recovery in volumes, large verticals like BFSI and Telecom (50% of sector revenues) should stabilize, with continued growth in Retail and Manufacturing, which has not been indicated by the results. VERTICAL WISE YOY GROWTH: MANUFACTURING AND RETAIL TAPERS 80% BFSI Manufacturing Retailing Telecom 40% 0% -40% Source: Compan/MOSL 3

4 Pricing stability positive, reduced headcount indicates aggressive cost focus Infosys' blended realizations declined 0.9% QoQ in CC terms. Onsite realizations increased by 0.6% while offshore realizations declined by 1.9%. Further, the company reduced its pricing decline guidance from 6-6.5% to 5%. We take the stability in pricing as positive, as compared to pricing declines of ~2% in 3Q and in CC terms. Increase in onsite pricing amidst continued pricing pressures signifies Infosys' focus on maintaining premium billing rates. Infosys' management said that while price negotiations have mostly concluded, clients could come back for additional negotiations, later. Infosys' unprecedented headcount reduction signifies focus on rationalizing costs. Involuntary attrition was 2.9% in. On a gross basis, headcount addition was at 3,538, with negative net addition at 945 employees. Utilization including trainees declined QoQ by 60bp, lower than our expectation to 67%, while utilization excluding trainees declined by 360bp to 70.9%. Valuation and view We are revising our FY10 EPS estimate upwards by 2%, while keeping our FY11 EPS estimate intact. Our revised estimates incorporate the following: [1] change in currency assumptions: exchange rate of Rs47.8/US$ for FY10 and Rs46/US$ for FY11, v/s Rs47.4/ US$ and Rs45/US$, earlier, [2] increase in taxation to 20% in FY10 and 24% in FY11 from 16.5% and 21%, respectively, [3] toning down of pricing assumptions to 5% decline from 7% decline earlier, and [4] impact of results. We believe the company's guidance is realistic and not conservative. Valuations of 17.4x FY10E EPS and 17.1x FY11E EPS are expensive. We maintain Neutral, with a target price of Rs1,615 (16x FY11E earnings). 4

5 INR REVENUES DE-GREW BY 2.9% QOQ, AHEAD OF EXPECTATIONS 60 Revenue (Rs b) - LHS INR Revenue Grow th (%) - RHS 16% 50 11% 40 6% 30 1% 20-4% FLAT US$ REVENUES QOQ V/S GUIDED DECLINE OF % 1,400 Revenue (US$ m) - LHS US$ Revenue Growth (%) - RHS 16% 1,100 9% 800 2% 500-5% % EBITDA MARGIN EXPANDS BY 50BP DUE TO STAFF RATIONALIZATION 8% S&M (as % of Sales) EBITDA Margins (RHS) 40% 6% 30% 4% 20% 2% 10% 0% 0% VOLUME DECLINE LOWER THAN EXPECTED Person Months ('000) Onsite Offshore IT Services Onsite Growth Volumes (RHS) Offshore Growth (RHS) 16% 11% 6% 1% -4% Source: Company/MOSL 5

6 UNPRECEDENTED HEADCOUNT DECLINE 14,000 Net Addition Gross Addition Employees 10,000 6,000 2,000-2,000 UTILIZATION DECLINE LOWER DUE TO REDUCTION IN HEADCOUNT 80% Utilization Incl. Trainees Utilization Excl. Trainees 76% 72% 68% 64% TOP CLIENT DECLINE CONTINUES, CONTRIBUTES LESS THAN 5% OF REVENUES 12 Revenue (RHS) Contribution (LHS) % US$ M 0 0 REDUCTION IN FPP CONTRIBUTION Fived Price Contract 32.8% 33.2% 32.8% 34.1% 36.3% 38.3% 38.1% 26.9% 26.2% 27.7% 25.9% 27.5% 29.8% Source: Company/MOSL 6

7 Infosys Technologies: an investment profile Company description Infosys is the second largest IT Services Company in India with revenues of around US$4.7b and employing over 103,000 people. Infosys defines designs and delivers IT enabled business solutions that help Global 2000 companies to win in a flat world. Infosys has a global footprint in 23 countries and development centers in India, China, Australia, the UK, Canada and Japan, Company's service offerings span business and technology consulting, ADM, SI, product engineering, IT infrastructure services and BPO. Recent developments Won 3 large outsourcing and 3 large transformational deals in. Infosys' solution won the Hitachi Data Systems Diamond Award for 'Best Virtualization Strategy'. Valuation and view CAGR of 4% and -1% in revenue and profit respectively, over FY09-FY11E. Valuations at 17.4x FY10E and 17.1x FY11E. Maintain Neutral with a price target of Rs1,615. Key investment arguments Most profitable company amongst frontline Indian IT companies. Wide services offering profile and deep domain depth. Key investment risks Uncertainties in the US financial markets and US economy slowing down in CY09, which could impact the IT spends of company's clients. US contributes around 60% of revenue. Protracted recovery in IT spends. Sector view Indian offshoring has been vindicated with the Global Clients and Service providers making India as their base for IT Enabled solutions. India has ~ 5% of Global IT markets. We are positive on sector from long term perspective. Credit crisis and US economy slow down, BFSI IT spends, pricing pressures, sharper currency appreciation are key concerns. We reckon frontline Indian IT companies would be better placed to sail through the near term adversities mentioned above. Niche IT/ITeS services companies with strong business model are also likely to be better placed to face uncertainties in near term. COMPARATIVE VALUATIONS INFOSYS TCS WIPRO P/E (x) FY10E FY11E P/BV (x) FY10E FY11E EV/Sales (x) FY10E FY11E EV/EBITDA (x) FY10E FY11E EPS: MOST FORECAST VS CONSENSUS (RS) MOST CONSENSUS VARIATION FORECAST FORECAST (%) FY FY TARGET PRICE AND RECOMMENDATION CURRENT TARGET UPSIDE RECO. PRICE (RS) PRICE (RS) (%) 1,727 1,615 - Neutral STOCK PERFORMANCE (1 YEAR) 1,900 Infosys (Rs) - LHS Rel. to Sensex (%) - RHS 30 SHAREHOLDING PATTERN (%) MAR-09 DEC-08 MAR-08 Promoter Domestic Inst Foreign Others , , , , Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 7

8 INCOME STATEMENT (RS MILLION) RATIOS Y/E MARCH E 2011E Sales 138, , , , ,477 Change (%) Software Develop. Exp. 74,580 92, , , ,712 Selling and Mktg. Exp. 9,290 9,160 11,040 11,434 13,042 Administration Exp. 11,150 13,310 16,290 17,270 17,732 EBITDA 43,910 52,380 71,950 71,229 74,991 % of Net Sales Depreciation 5,140 5,980 7,610 8,703 8,466 Other Income 3,700 7,040 4,730 8,690 9,827 PBT 42,470 53,440 69,070 71,215 76,353 Tax 5,110 8,060 10,270 14,293 18,325 Rate (%) Minority Interest Adjusted PAT 37,250 45,380 58,800 56,922 58,028 Extraordinary Items -1,310-1,210-1, Reported PAT 38,560 46,590 59,880 56,922 58,028 Change (%) BALANCE SHEET (RS MILLION) Y/E MARCH E 2011E Share Capital 2,860 2,860 2,860 2,860 2,860 Reserves 109, , , , ,302 Net Worth 112, , , , ,162 Minority Interest Loans Capital Employed 112, , , , ,162 Gross Block 46,420 54,390 70,930 78,120 87,120 Less : Depreciation 18,360 19,860 24,160 32,853 41,319 Net Block 28,060 34,530 46,770 45,267 45,801 CWIP 9,650 13,240 6,770 5,570 5,570 Investments ,520 11,520 Curr. Assets 96, , , , ,568 Debtors 24,360 32,970 36,720 35,687 38,544 Cash & Bank Balance 58,710 69,500 96, , ,207 Loans & Advances 12,140 27,710 32,790 35,399 41,466 Other Current Assets 920 1,190 1,260 1,350 1,350 Current Liab. & Prov 21,500 41,910 38,720 35,131 38,296 Current Liabilities 14,690 19,120 20,040 19,908 21,767 Provisions 6,810 22,790 18,680 15,223 16,529 Net Current Assets 74,630 89, , , ,271 Application of Funds 112, , , , ,162 E: MOSL Estimates Y/E MARCH E 2011E Basic (Rs) EPS Cash EPS Book Value DPS Payout % (excl.div.taxes) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Fixed Asset Turnover (x) Leverage Ratio (x) Debt/Equity Ratio(x) CASH FLOW STATEMENT (RS MILLION) Y/E MARCH E 2011E CF from Operations 42,140 52,300 67,420 65,536 66,494 Cash for Working Capital -9,410-3,770-12,020-5,164-5,760 Net Operating CF 32,730 48,530 55,400 60,372 60,734 Net Purchase of FA -20,590-16,040-13,380-6,000-9,000 Net Purchase of Invest. 8, ,520 0 Net Cash from Invest -12,000-16,510-12,660-17,520-9,000 Proceeds from Equity 11,200 1, Dividend Payments -7,510-22,240-15,730-18,769-20,110 Cash Flow from Fin. 3,690-21,230-15,290-18,219-20,110 Net Cash Flow 24,420 10,790 27,450 24,633 31,625 Opening Cash Bal. 34,290 58,710 69,500 96, ,582 Add: Net Cash 24,420 10,790 27,450 24,633 31,625 Closing Cash Bal. 58,710 69,500 96, , ,207 8

9 NOTES 9

10 For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) Fax: (91-22) Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement Infosys Technologies 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 10