1) Infosys reported modest revenue growth of 3.2% qoq for 1QFY2012. EBITDA and margins declined due to wage hikes.
2) Guidance for 2QFY2012 revenue growth was lower than expected at 3.5-5% qoq. Annual revenue growth guidance was unchanged.
3) The analyst expects challenges in meeting the upper end of annual guidance given macro concerns and lowered 2Q guidance. Estimates were cut and the target price was revised downwards to Rs 3,200.
1. 1QFY2012 Result Update | IT
July 12, 2011
Infosys ACCUMULATE
CMP `2,794
Performance highlights Target Price `3,200
(` cr) 1QFY12 4QFY11 % chg (qoq) 1QFY11 % chg (yoy) Investment Period 12 Months
Net revenue 7,485 7,250 3.2 6,198 20.8
EBITDA 2,176 2,324 (6.4) 1,962 10.9
Stock Info
EBITDA margin (%) 29.1 32.1 (298)bp 31.7 (259)bp
Sector IT
PAT 1,722 1,818 (5.3) 1,488 15.7
Market Cap (` cr) 159,831
Source: Company, Angel Research
Beta 0.8
For 1QFY2012, Infosys reported results that were almost in-line with our as well 52 Week High / Low 3,494/2661
as street expectations. The company’s performance was modest with 4.0% qoq
Avg. Daily Volume 114,998
volume growth. The disappointment came from lower-than-expected 2QFY2012
guidance of 3.5–5.0% qoq growth in USD revenue, which is seasonally the Face Value (`) 5
strongest quarter. Also, revenue growth guidance for FY2012 was left unchanged BSE Sensex 18,412
at 18–20% yoy growth. We expect revenue growth (in USD terms) to record a Nifty 5,825
21% CAGR over FY2011–13E. We recommend Accumulate on the stock. Reuters Code INFY.BO
Modest results: For 1QFY2012, Infosys reported revenue of US$1,671mn, Bloomberg Code INFY@IN
up 4.3% qoq. In INR terms, revenue came in at `7,485cr, registering 3.2% qoq
growth due to INR appreciation of 1.0% qoq against USD. The company’s
EBITDA and EBIT margins declined by 298bp and 291bp qoq to 29.1% Shareholding Pattern (%)
and 26.1%, respectively, due to wage hikes given in 1QFY2012, effective from Promoters 16.0
April 1, 2011.
MF / Banks / Indian Fls 9.8
Outlook and valuation: Management has indicated 2QFY2012 revenue growth FII / NRIs / OCBs 36.9
to be 3.5–5.0% qoq only and has kept the annual revenue guidance unchanged Indian Public / Others 37.2
at 18–20% yoy. This implies an ask rate of 5.5% CQGR in revenue over
2HFY2012 to meet the upper end of the guidance. Also, in the midst of looming
macro concerns and subdued ramp-ups in discretionary spending, the Abs. (%) 3m 1yr 3yr
outperformance of 3–5% on management’s upper end of the guidance looks
Sensex (4.4) 2.6 36.7
limited as it implies an ask rate of 6.5–7.5% CQGR in revenue over 2HFY2012.
Being cognizant of the deteriorating macros, client-specific issues (BT account still Infosys (7.7) 3.2 78.3
being anaemic) and muted earnings guidance for FY2012, we have cut our EPS
estimates for FY2012 and FY2013 to `137 and `160, respectively. Thus, we
revise our one-year forward target PEx downwards to 20x from 21x and value
the stock at a target price of `3,200 (earlier `3,424) and recommend
Accumulate on the stock.
Key financials (Consolidated)
Y/E March (` cr) FY2009 FY2010 FY2011 FY2012E FY2013E
Net sales 21,693 22,742 27,501 32,497 39,017
% chg 30.0 4.8 20.9 18.2 20.1
Net profit 5,990 6,219 6,823 7,819 9,136
% chg 28.6 3.8 9.7 14.6 16.8
EBITDA margin (%) 33.2 34.5 32.6 30.9 30.6
EPS (`) 104.6 109.5 119.5 136.9 159.9
P/E (x) 26.7 25.5 23.4 20.4 17.5 Srishti Anand
P/BV (x) 8.3 6.6 5.9 4.8 4.0 022-39357800 Ext: 6820
RoE (%) 31.2 25.8 25.0 23.6 22.7 srishti.anand@angelbroking.com
RoCE (%) 29.0 25.0 25.9 24.6 24.7
Ankita Somani
EV/Sales (x) 6.9 6.3 5.2 4.3 3.4
022-39357800 Ext: 6819
EV/EBITDA (x) 20.7 18.3 16.0 13.9 11.2
ankita.somani@angelbrkoing.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. Infosys | 1QFY2012 Result Update
Exhibit 1: 1QFY2012 performance (IFRS, consolidated)
(` cr) 1QFY12 4QFY11 % chg (qoq) 1QFY11 % chg (yoy) FY2011 FY2010 % chg (yoy)
Net revenue 7,485 7,250 3.2 6,198 20.8 27,501 22,742 20.9
Cost of revenue 4,353 4,012 8.5 3,441 26.5 15,054 12,078 24.6
Gross profit 3,132 3,238 (3.3) 2,757 13.6 12,447 10,664 16.7
SG&A expenses 956 914 4.6 795 20.3 3,483 2,812 23.9
EBITDA 2,176 2,324 (6.4) 1,962 10.9 8,964 7,852 14.2
Depreciation 224 222 0.9 207 8.2 862 942 (8.5)
EBIT 1,952 2,102 (7.1) 1,755 11.2 8,102 6,910 17.3
Other income 443 415 239 1,211 990
PBT 2,395 2,517 (4.8) 1,994 20.1 9,313 7,900 17.9
Income tax 673 699 (3.7) 506 33.0 2,490 1,681 48.1
PAT 1,722 1,818 (5.3) 1,488 15.7 6,823 6,219 9.7
EPS 30.2 31.8 (5.3) 26.1 15.7 119.5 109.5 9.2
Gross margin (%) 41.8 44.7 (282)bp 44.5 (264)bp 45.3 46.9 (163)bp
EBITDA margin (%) 29.1 32.1 (298)bp 31.7 (259)bp 32.6 34.5 (193)bp
EBIT margin (%) 26.1 29.0 (291)bp 28.3 (224)bp 29.5 30.4 (92)bp
PAT margin (%) 21.7 23.7 (200)bp 23.1 (140)bp 23.8 26.2 (244)bp
Source: Company, Angel Research
Exhibit 2: 1QFY2011 – Actual vs. Angel estimates
(` cr) Actual Estimate % Var.
Net revenue 7,485 7,435 0.7
EBITDA margin (%) 29.1 29.3 (22)bp
PAT 1,722 1,689 1.9
Source: Company, Angel Research
Modest show
For 1QFY2012, Infosys reported revenue of US$1,671mn, up 4.3% qoq, primarily
on the back of decent 4.0% qoq volume growth. The 4.0% qoq volume growth was
mainly driven by 6.8% qoq growth in onsite volumes; offshore volumes grew by
2.7% qoq. Pricing remained stable during the quarter.
The cross-currency movement benefited USD revenue by 1.2% qoq. Revenue in
constant currency (CC) terms came in at US$1,651mn, up 3.1% qoq. In INR terms,
revenue came in at `7,485cr, registering 3.2% qoq growth – lower growth as
against USD revenue due to INR appreciation of 1.0% qoq against the USD in
1QFY2012. During the quarter, the company signed three large deals and three
transformational deals.
July 12, 2011 2
3. Infosys | 1QFY2012 Result Update
Exhibit 3: Trend in volume growth (Effort wise)
15
12 11.4
9 7.9 7.6 7.2 6.8
7.0
5.5
6
(%)
3.5 4.0
3.1
3 2.3 2.7
0
(0.2)
(3) (1.4)
(2.0)
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Offshore Onsite Total volume growth
Source: Company, Angel Research
Exhibit 4: Trend in volume and revenue growth (qoq)
10 9.3
7.6
8
6 7.2
4.7
(%)
4 6.0 4.0
3.1
2 3.1
0.8
0
(1.4)
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
(2)
Revenue growth (constant currency) Volume growth
Source: Company, Angel Research
Decent growth across industries (ex. telecom) and services
Infosys reclassified its service offerings in three categories – 1) business operations,
2) consulting and system integration and 3) products, platforms and solutions.
Business operations (contributed 60% to revenue) grew by 4.3% qoq, majorly led
by 7.2% qoq growth in testing services. Application development, application
maintenance and IMS posted 5.0%, 5.7% and 0.9% qoq growth in revenue,
respectively. Revenue from BPO stood almost flat qoq, with merely 0.6% qoq
growth. The company added eight new clients in the BPO space.
Consulting and system integration (contributed 31.7% to revenue) grew by 4.0%
qoq, majorly led by 7.7% qoq growth in revenue from system integration. Revenue
from consulting and package implementation grew by 3.5% qoq.
The major growth driver for the company was products, platforms and solutions
(contributed 8.3% to revenue), which grew by 5.6% qoq, led by whopping 39.1%
qoq growth in revenue from product engineering services. During the quarter,
the company signed five platform deals in this segment.
July 12, 2011 3
4. Infosys | 1QFY2012 Result Update
Exhibit 5: Growth trend in service verticals (Reported basis)
Particulars % to revenue % growth qoq % growth yoy
Business operations 60.0 4.3 16.6
Application development 16.1 5.0 17.2
Application maintenance 22.3 5.7 14.8
Infrastructure management services (IMS) 5.9 0.9 5.2
Testing services 7.5 7.2 26.4
Business process management (BPO) 5.4 0.6 16.6
Others 2.8 (2.6) 32.5
Consulting and systems integration 31.7 4.0 32.7
Consulting and package implementation 25.2 3.5 24.0
Systems integration 6.3 7.7 80.3
Others 0.2 (30.5) 146.1
Products, platforms and solutions 8.3 5.6 39.9
Products 4.8 (7.3) 25.7
Product engineering services 3.2 39.1 87.5
Others 0.3 (21.8) (26.2)
Source: Company, Angel Research
Industry wise, growth rates were modest. The company reclassified its industry
segments as: 1) financial services and insurance (FSI), 2) manufacturing, 3) retail,
logistics, CPG and lifesciences (RCL) and 4) energy and utilities and
communication and services (ECS).
The company’s anchor FSI vertical (contributed 35.4% to revenue) grew by 3.4%
qoq, led by 5.8% qoq growth in the insurance industry. Banking and financial
services grew by 2.9% qoq. In CC terms, revenue from FSI grew by 2.1% qoq.
Going ahead, the company is seeing traction in this vertical from risk compliance,
fraud prevention and regulatory kind of work.
Manufacturing (contributed 20.3% to revenue) registered 3.8% qoq growth,
extending its strong growth reported in 2HFY2011. In CC terms, revenue from this
vertical grew by 2.7% qoq. The company is seeing IT spending coming in the
manufacturing industry segment from clients in terms of work related to
harmonising processes and transformation to gain cost efficiency and simplicity.
The RCL segment (contributed 22.7% to revenue) emerged as the major growth
driver for the company, growing by whopping 10.7% qoq. This was majorly led by
15.8% qoq growth in retail and CPG. In CC terms, revenue from RCL grew
strongly by 9.3% qoq. In this industry segment, retail is gaining good traction on
account of spend related to digital commerce, digital marketing and clients
targeting to go global. Currently, the company is close to signing two deals in the
digital marketing space with two new deals in the pipeline. Also, CPG companies
are investing a lot in package implementation kind of services.
The ECS segment (contributed 21.6% to revenue) remained sluggish during the
quarter, with revenue inching up by merely 0.1% qoq. In CC terms, revenue from
this segment declined by 1.4% qoq. This was majorly due to a 7.1% qoq decline in
revenue from communication and media, which includes telecom, due to
client-specific issues (of the telecom industry) in Europe. Going ahead,
the company expects its deal pipeline to pick-up for the telecom industry segment
July 12, 2011 4
5. Infosys | 1QFY2012 Result Update
with more spend coming in from the wireless space. Infosys has just won two new
deals in the telecom industry segment. Revenue from energy and utilities, however,
grew by 2.5% qoq. The company is seeing traction coming in the energy and
utilities industry segment from smart grid and safety kind of work.
Exhibit 6: Growth trend in industry segments (Reported basis)
Particulars % to revenue % growth qoq % growth yoy
FSI 35.4 3.4 20.6
Banking and financial services 28.1 2.9 24.8
Insurance 7.3 5.8 6.9
Manufacturing 20.3 3.8 28.2
RCL 22.7 10.7 44.2
Retail and CPG 16.1 15.8 50.6
Transport and logistics 1.8 (10.6) 19.7
Life Sciences 3.7 4.3 35.1
Healthcare 1.1 4.3 36.5
ECS 21.6 0.1 6.1
Energy and utilities 5.7 2.5 16.0
Communication and services 10.6 (7.1) (7.8)
Others 5.3 15.2 34.1
Source: Company, Angel Research
In terms of geographies, revenue from North America and Rest of the World grew
by 5.1% and 2.4% qoq in CC terms, respectively. However, revenue from Europe
declined by 2.6% qoq in CC terms due to client-specific issues in this geography,
especially in the telecom industry.
Exhibit 7: Growth trend in geographies (CC basis)
16 15.6
13.3
12
9.7
6.9 7.5
8
4.7 5.1
4.2 3.7
(%)
4 2.4
1.6 2.1
0
(0.5)
(0.8)
(4) (2.6)
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
North America Europe Rest of the world
Source: Company, Angel Research
July 12, 2011 5
6. Infosys | 1QFY2012 Result Update
Hiring spree continues
Infosys added 9,922 gross employees in 1QFY2012, of which 4,044 were lateral
additions. The net addition number, however, stood a tad lower than expectations
at 2,740. Attrition, on LTM basis, declined to 15.8% in 1QFY2012 from 17.0% in
4QFY2011. However, attrition rate on a quarterly annualised basis increased to
~22% in 1QFY2012 from ~18.4% in 4QFY2011. Management plans to hire
~12,000 employees in 2QFY2012.
Exhibit 8: Employee metrics
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Gross addition 8,859 14,264 11,067 8,930 9,922
Net addition 1,026 7,646 5,311 3,041 2,740
Lateral employees 2,942 4,138 5,212 3,591 4,044
Attrition – LTM basis (%) 15.8 17.1 17.5 17.0 15.8
Source: Company, Angel Research
Utilisation, including trainees, inched up by 120bp qoq to 69.6% as trainees hired
a couple of quarters back turned billable in this quarter. However, utilisation,
excluding trainees, dipped by 30bp qoq to 74.9%.
Exhibit 9: Trend in utilisation
85
81.2 80.7
78.7
80
75.2 74.9
75
(%)
74.3
70 73.0 72.6
69.6
68.4
65
60
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Including trainees Excluding trainees
Source: Company, Angel Research
Margins decline
The company’s EBITDA and EBIT margins declined by 298bp and 291bp qoq to
29.1% and 26.1%, respectively, due to wage hikes given in 1QFY2012 (10–12%
for offshore employees and 2–3% for onsite employees) effective from April 1,
2011. Also, EBIT margin got negatively impacted by 40bp qoq due to INR
appreciation against USD.
July 12, 2011 6
7. Infosys | 1QFY2012 Result Update
Exhibit 10: Trend in EBITDA margin
200 33.3 33.3 34
167 33
100
31.7 32.1
32
0
31
(7)
(BP)
(100) (120) 30
(%)
29.1
(233) 29
(200)
(298) 28
(300)
27
(400) 26
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Margin movement (qoq) EBITDA margin (%)
Source: Company, Angel Research
For FY2012, management had previously guided for a 300bp yoy decline in EBIT
margin, which now has been changed to 250bp yoy.
Client pyramid enhances
Infosys added 26 new clients during the quarter. In 1QFY2012, seven clients from
the US$10mn–20mn bracket moved to higher brackets – of which three shifted to
the US$20mn–50mn bracket and four shifted to the US$50mn–100mn
bracket. Also, 12 new clients came into the US$1mn–5mn bracket. However,
the US$5mn–10mn bracket saw a decline of three clients. The active client base of
the company increased to 628 in 1QFY2012 from 620 in 4QFY2011.
Exhibit 11: Client metrics
Particulars 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12
Top client (% of revenue) 4.9 4.7 4.6 4.7 4.5
Client addition 38 27 40 34 26
Active client 590 592 612 620 628
US$1mn–5mn 171 164 170 179 191
US$5mn–10mn 67 60 59 61 58
US$10mn–20mn 43 47 53 53 45
US$20mn–50mn 34 39 39 45 48
US$50mn–100mn 18 17 18 17 21
US$100mn–200mn 7 8 9 9 9
US$200mn plus 1 2 2 2 2
Source: Company, Angel Research
Guidance
The FY2012 USD revenue growth guidance was left unchanged at 18–20% yoy to
US$7.13bn–7.25bn. For 2QFY2012, Infosys has guided for 3.5–5.0% qoq growth
in USD revenue to US$1.730bn–1.755bn, which is lower than our expectations
and indicates that management is banking on back-ended growth (in 2HFY2012),
which makes us cautious as the second half of every fiscal year is typically slow.
EPS guidance for FY2012 increased to US$2.88–2.92, 10.0–11.5% yoy growth vs.
the previous guidance of 8–10% yoy growth.
July 12, 2011 7
8. Infosys | 1QFY2012 Result Update
On the margin front, Infosys expects a 250bp yoy decline in its margin because of
1) 80bp negative impact due to INR appreciation against USD, assuming average
rate of 44.50 for FY2012, 2) 100bp negative impact due to utilisation coming off
on account of hiring to maintain bench so as to map into any uptick in demand
coming in and 3) 70bp negative impact due to higher employee costs.
Exhibit 12: 2QFY2012 and FY2012 guidance
FY2012-Previous FY2012-Revised
Guidance (IFRS) 2QFY2012
(As on 4QFY2011) (As on 1QFY2012)
Revenue (` cr) 7,699-7,810 31,727-32,270 31,777-32,311
EPS (`) 29.64-30.15 126.05-128.21 128.20-130.08
Revenue (US$bn) 1.730-1.755 7.13-7.25 7.13-7.25
Basic EPADS (US$) 0.67-0.68 2.83-2.88 2.88-2.92
Source: Company, Angel Research
Outlook and valuation
Management has indicated 2QFY2012 revenue growth to be 3.5–5.0% qoq only
and has kept the annual revenue guidance unchanged at 18–20% yoy. This
implies an ask rate of 5.5% CQGR in revenue over 2HFY2012 to meet the upper
end of the guidance. Also in the midst of looming macro concerns and subdued
ramp-ups in discretionary spending, the outperformance of 3–5% on
management’s upper end of the guidance looks limited as it implies an ask rate of
6.5–7.5% CQGR in revenue over 2HFY2012. Typically, 2H is sluggish and risks
like 1) unanticipated higher days of closure in 3Q for the holiday season and
2) probability of clients delaying the outlay due to kick off in next-year budgeting
cycles prevail. Thus, the deviation from a normal year (i.e. front-ended growth) to
back-ended growth is worrisome and restricts the probable outperformance of
management’s guidance. Thus, we revise down our USD revenue CAGR estimate
over FY2011–13E to 21% from 23.5%. Margin headwinds such as 1) weak
utilisation (yoy) due to strong fresher hiring and 2) limited volume growth resulting
in non-absorption of the full impact of annual wage hikes and 3) INR appreciation
are expected to pull down the company’s EBITDA margin to 30.9% and 30.6% in
FY2012E and FY2013E, respectively, from 32.6% in FY2011. Thus, we expect
Infosys to report revenue (INR terms), EBITDA and PAT CAGR of 19.1%, 15.3% and
15.7%, respectively.
Being cognizant of the deteriorating macros, client-specific issues (BT account still
being anaemic) and muted earnings guidance for FY2012, we have cut our EPS
estimates for FY2012 and FY2013 to `137 and `160, respectively. Thus, we revise
our one-year forward target PEx downwards to 20x from 21x and value the
company at a target price of `3,200 (earlier `3,424) and recommend Accumulate
on the stock.
July 12, 2011 8
15. Infosys | 1QFY2012 Result Update
Research Team Tel: 022 - 39357800 E-mail: research@angelbroking.com Website: www.angelbroking.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 No
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 ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 12, 2011 15