1. 4QFY2010 Result Update I IT
April 13, 2010
Infosys Accumulate
CMP Rs2,782
Performance Highlights Target Price Rs3,044
Infosys registered an outstanding performance for 4QFY2010 vis-à-vis the Investment Period 12 Months
guidance and consensus estimates. Sequentially, the Top-line grew by 3.5% in
Rupee-terms, while in US $-terms it grew by 5.2%, which was 3.9% and 3.7% Stock Info
ahead of its revenue guidance of Rs5,721cr and US $1,250mn, respectively, Sector IT
for the quarter. The growth was backed by volumes, which were up by 5.2%
qoq, while the pricing was lower by 1.5%. The growth in reported currency Market Cap (Rs cr) 1,59,657
was down on account of Rupee appreciation of 1.6% qoq vis-à-vis the US
Beta 0.7
Dollar, and the unfavorable cross-currency impact. The company added a
total of 47 new clients and entered two large transformational deals, thereby 52 WK High / Low 2,821/1,300
confirming the improved IT demand environment and the onset of
Avg. Daily Volume 1,71,109
discretionary IT spends. We maintain an Accumulate on the stock.
Face Value (Rs) 5
All-round growth, led mainly by strong volumes: The growth was broad-
based, across the services segment, with the company delivering a strong BSE Sensex 17,822
sequential growth of 13.1%, 10.2% and 26.3% in Consulting and Package
Nifty 5,323
Implementation (PI), Testing and Products, respectively. However, on account
of strong lateral manpower intake, increase in SG&A and a 70bp negative Reuters Code INFY.BO
impact of the Rupee’s appreciation against the USD, EBIDTA Margins
Bloomberg Code INFO@IN
contracted by 148bp qoq, resulting in a lower growth of 2.2% in the net profit.
Shareholding Pattern (%)
FY2011E guidance strong in US $ terms, but lower in Rupee terms: Infosys’s
FY2011E Revenue growth guidance in US Dollar terms ranges between 15.9% Promoters 16.1
to 18%, and EPS growth ranges between 8.7% to 4.3%. However, on account
of an expected 6% yoy appreciation in the average Rupee rate vis-à-vis the US MF/Banks/Indian FIs 13.3
Dollar, the company’s FY2011E guidance in Rupee terms remains subdued, FII/NRIs/OCBs 55.8
with revenue expected to range between Rs24,796-25,239cr, implying a yoy
growth of 9% to 11%, and the EPS expected to range between Rs106.8-111.3, Indian Public 14.8
implying a -2.6% to1.4% yoy growth. Abs. (%) 3m 1yr 3yr
Outlook and Valuation: The stock is currently trading at 23.7x its FY2011E Sensex 1.8 62.5 33.2
EPS of Rs117.2 and at 20.1x its FY2012E EPS of Rs138.4. We have valued the
stock at 22x (1.2x PEG) its FY2012E earnings, in-line with its historical average Infosys 3.6 97.5 33.3
of 21.5x during FY2007-2010, and at a 30% premium to our Sensex target PE
of 17x, as against a historical premium of 42% during FY2007-2010. Hence,
we maintain our Accumulate rating on the stock, with a Target price of
Rs3,044.
Key Financials
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 21,693 22,743 25,658 31,071
% chg 27.4 6.8 13.2 21.3
Net Profit 6,083 6,219 6,702 7,916
% chg 28.5 3.9 7.8 18.1
EBITDA Margin (%) 33.6 34.6 34.2 33.4
FDEPS (Rs) 104.7 108.7 117.2 138.4
P/E (x) 26.6 25.6 23.7 20.1 Rahul Jain
P/BV (x) 8.7 7.0 5.8 4.8 Tel: 022 – 4040 3800 Ext: 345
E-mail: Rahul.j@angeltrade.com
RoE (%) 37.4 30.3 26.7 26.1
RoCE (%) 43.1 38.4 35.5 35.3
Vibha Salvi
EV/Sales (x) 6.9 6.4 5.5 4.4
Tel: 022 – 4040 3800 Ext: 329
EV/EBITDA (x) 19.5 16.5 14.3 11.7
E-mail: vibhas.salvi@angeltrade.com
Source: Company, Angel Research
1
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539
2. Infosys I 4QFY2010 Result Update
Exhibit 1: 4QFY2010 Performance (Consolidated, India GAAP)
Y/E March (Rs cr) FY2010 FY2010 % chg FY2009 % chg FY2010 FY2009 % chg
4Q 3Q (qoq) 4Q (yoy)
Net Revenues 5,944 5,741 3.5 5,635 5.5 22,742 21,693 4.8
Software Development Expenses 3,184 3,009 5.8 3,045 4.6 12,071 11,765 2.6
Gross Profit 2,760 2,732 1.0 2,590 6.6 10,671 9,928 7.5
SG&A Expenses 738 694 6.3 699 5.6 2,810 2,733 2.8
Operating Profit (EBITDA) 2,022 2,038 (0.8) 1,891 6.9 7,861 7,195 9.3
Other Income 198 231 (14.3) 252 (21.4) 934 473 97.5
Depreciation 220 231 (4.8) 228 (3.5) 905 761 18.9
Provision for Investments (10) 1 0 (9) 0
Income before Income Taxes 2,010 2,037 (1.3) 1,915 5.0 7,899 6,907 14.4
Tax 441 455 (3.1) 302 46.0 1,681 919 82.9
Minority Interest 0 0 0 0 0
Extraordinary Items 48 0 0 48 0
Net Income 1,617 1,582 2.2 1,613 0.2 6,266 5,988 4.6
Diluted EPS (Rs) 28.3 27.7 2.1 28.1 0.6 109.7 104.4 5.1
Gross Profit Margin (%) 46.4 47.6 46.0 46.9 45.8
Source: Company, Angel Research
Top-line growth across services and verticals, driven by strong volumes
Infosys recorded a 3.5% qoq (5.5% yoy) Top-line growth in 4QFY2010, backed by a
5.2% qoq growth in volumes, despite a 1.5% qoq dip in blended pricing and the
negative impact of a 1.6% qoq Rupee appreciation vis-à-vis the US Dollar. The
annual revenues of the company for FY2010 were also driven by a 6.7% volume
growth, inspite of blended pricing playing spoilsport and dropping by 4% on an
average.
Exhibit 2: 4QFY2010 - Company Guidance v/s Actual Performance
4QFY2010 Guidance Range Performance
Indian GAAP
Revenues (Rs cr) 5,675-5,721 5,944
EPS (Rs) 25.62-25.83 28.3
IFRS
Revenues (US $mn) 1,240-1,250 1,296
Basic EPADS (US$) 0.56 0.61
Source: Company, Angel Research
The growth was led by a strong sequential growth of 13.1%, 10.2% and 26.3% in
Consulting and PI, Testing services and Products, respectively. Verticals-wise, Infosys
witnessed a strong growth of 4.1% in BFSI, led by a 7.5% growth in the banking
domain, while the manufacturing and transportation verticals grew by 8.4% and
3.5%, respectively.
The company added 47 new clients during the quarter, of which 14 were in BFSI,
taking the total active clients count to 575. The Top 25 client accounts witnessed a
7.5% qoq growth. Infosys entered into five large deals in 4QFY2010, of which two
were US $150mn size large transformational deals in Consulting and PI services,
while the others were large outsourcing deals. The company’s hedge position as on
date stands at US $515mn (US $669mn in 3QFY2010).
April 13, 2010 2
3. Infosys I 4QFY2010 Result Update
Rupee Appreciation and Increase in Costs impacts Margins
During 4QFY2010, Infosys recorded a 148bp qoq (46bp increase yoy) contraction
in its EBITDA Margin, of which ~ 70bp impact was on account of the Rupee’s
appreciation vis-à-vis the US Dollar, while the balance 78bp negative impact was
with the increase in employee costs and SG&A expenses. Blended utilisation during
the quarter, including trainees, improved by 50bp to 69.3%, while, excluding
trainees, it improved by 90bp to 77.1%, on a sequential basis.
Exhibit 3: EBITDA Margin Trend
37
35
33
(%)
31
29
27
3QFY07
4QFY07
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
Source: Company, Angel Research
Bottom-line growth restrained, due to higher tax outgo
Despite a 0.8% qoq decline in operating profits, Infosys’s Net Profit grew by 2.2%
qoq (up 0.2% yoy), on account of lower depreciation and extraordinary gains of
Rs48cr (the company sold its 60% stake in the US-based company, OnMobile
Systems Inc). We expect profitability to decline by 200bp over FY2010-12E, on
account of lower realisations, wage inflation and a higher tax rate (effective tax rate
of 25% in FY2011E, as against 21% in FY2010).
Gross addition of 9,313 employees in 4QFY2010
Infosys added a gross of 9,313 employees in 4QFY2010, while net additions were
3,914 (vis-à-vis 4,429 employees in 3QFY2010). The company has 113,796
employees on its rolls as of FY2010, and has guided a gross addition target of
about 30,000 employees over FY2011E. The attrition rate stood at 13.4% for
FY2010 and is expected to go down as the company has announced an average
wage hike of 2-3% for onsite and 14% for offshore headcounts. The wage hike has
been part of its retention policy for trained manpower and would impact its
profitability in the coming quarters.
Subdued 1QFY2011E guidance
Although the company witnessed a strong performance during 4QFY2010, it has
given a subdued guidance for 1QFY2010E in Rupee terms, with revenues expected
to range between Rs5,919-5,963cr, implying a qoq growth of -0.4% to 0.3% on
account of a further expected appreciation in Rupee rate vis-à-vis US Dollar. The EPS
is expected to range between Rs24.34-24.79, implying a qoq decline of 12% to
13.9%, attributed to lower EBIDTA margins (expected to be down by 300bp qoq),
primarily due to an increased manpower intake and annual wage hikes (effective
from April 1, 2010).
April 13, 2010 3
4. Infosys I 4QFY2010 Result Update
FY2011E guidance strong in US $ terms but lower in Rupee terms
Infosys’s FY2011E Revenue growth guidance in US Dollar terms ranges between
15.9% to 18%, and EPS growth ranges between 8.7% to 4.3%. However, on account
of an expected 6% yoy appreciation in the average Rupee rate vis-à-vis the US
Dollar, the company’s FY2011E guidance in Rupee terms remains subdued, with
revenue expected to range between Rs24,796-25,239cr, implying a yoy growth of
9% to 11%, and the EPS expected to range between Rs106.8-111.3, implying a
-2.6% to1.4% yoy growth.
However, we believe that the company would beat both its revenue and earning
guidance for FY2011E, on account of the improved business scenario and efficient
margin resilience. As per our estimates, the Revenue and EPS for FY2011E will grow
by 12.8% and 7.8%, to Rs25,658cr and Rs117.2, respectively.
Exhibit 4: 1QFY2011E and FY2011E Guidance
Guidance 1QFY11E FY2011E
Indian GAAP
Revenues (Rs cr) 5,919-5,963 24,796-25,239
EPS (Rs) 24.34-24.79 106.82-111.28
IFRS
Revenues (US $bn) 1.33-1.34 5.57-5.67
Basic EPADS (US $) 0.55-0.56 2.40-2.50
Source: Company, Angel Research
April 13, 2010 4
5. Infosys I 4QFY2010 Result Update
Outlook and Valuation
Infosys’s 4QFY2010 performance was well in line with our estimate of a 5.2% qoq
growth at US $1,296mn. The operating profitability was lower by 148bp on account
of higher wage costs and the Rupee’s appreciation against all major currencies. The
company guided a 15.9% to 18% revenue growth in US $-terms for FY2011E, which
highlights the strong business confidence. The company managed to close the year
FY2010 with a top-line growth of 4.8%, and now, with strong traction in most of the
verticals, we believe that it will deliver better results than the guided numbers.
Although the revenue guidance in US $-terms is strong, the Rupee appreciation is
likely to drag the revenue growth in the reported currency. Overall, the realised rate
for the USD is likely to be lower by 600bp at Rs44.5/USD in FY2011E (as compared
to Rs47.34/USD in FY2010). The sharp appreciation in FX would impact the
margins by 150bp. The company has also announced a salary hike of about 14%
offshore and 2-3% onsite, effective from April 1, 2010, which would further impact
earnings in 1QFY2011E. However, the impact of the high wage costs would get
neutralised from 2QFY2011E onwards, as the large hiring (guided gross addition of
30,000 employees for FY2011E) would provide the benefit of a favourable bulge
mix and would improve utilisation from its current levels. The effective tax rate is also
likely to go up to 25% in FY2011E, as about 80% of the revenues would come under
the tax ambit.
We expect Infosys to register a top-line CAGR of 17% over FY2010-12E; however,
the EPS is likely to register a subdued CAGR of 12.8% during the same period. We
believe that the growth would largely be volume-driven, as any improvement in the
pricing would be subdued on account of a higher offshore effort mix in the coming
period. The stock is currently trading at 23.7x its FY2011E EPS of Rs117.2 and at
20x its FY2012E EPS of Rs138.4. We believe that the current valuation has priced in
an implicit revenue growth of 17%+, and would not lead to any earnings/target
upgrades. We have valued the stock at 22x (1.2x PEG) its FY2012E earnings, in-line
with its historical average of 21.5x during FY2007-2010, and at a 30% premium to
our Sensex target PE of 17x, as against a historical premium of 42% during
FY2007-2010. We have accounted for a lower premium over the Sensex, on
account of a lower expected earnings growth for Infosys and its likely expected
underperformance vis-à-vis the benchmark indices. We maintain out Accumulate
rating on the stock, with a Target price of Rs3,044.
Exhibit 5: Premium/Discount in Infosys P/E v/s Sensex P/E
160
140
120
100
80
60
40
20
0
-20
-40
3/31/2006 3/31/2007 3/31/2008 3/31/2009
Premium/Discount to Sensex Avg. Historical Premium
Source: Company, Angel Research
April 13, 2010 5
10. Infosys I 4QFY2010 Result Update
Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement Infosys
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies’ Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors..
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Tel : (022) 3952 4568 / 4040 3800
Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE:
INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946
Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM /
CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302
April 13, 2010 10
