Infosys numbers reasonably strong; recommends buy: JMMS

J M Morgan Stanley is bullish on Infosys Technologies and has recommended buy rating on the stock.

J M Morgan Stanley report on Infosys :

"Infosys’ F3Q07 numbers were reasonably strong, especially in the backdrop of the 3.8% rupee appreciation against the USD that the company effectively recorded during the quarter. Revenue rose 10% QoQ in USD terms and EBITDA margin rose a surprising 60 bps sequentially. Net income numbers were well ahead of guidance and slightly ahead of consensus estimates. F4Q07 guidance is muted - 4% QoQ revenue growth and 1.4% earnings growth (the company had guided for 5% revenue growth and 0.5% earnings growth for F3Q07)."

What’s New

"Infosys reported 6% QoQ revenue and net income growth, while EBITDA margin expanded by 60 bps and EBIT margin by 30 bps. The company indicated that the rupee appreciation would have negatively affected margins by about 200 bps. Offshore and onsite pricing went up 1.7% and 1.9% QoQ - or up 3.3%/5.1% YoY. F2007 guidance has been revised up marginally."

Implications

"While the element of positive surprise has been a lot lower than that in the prior two quarters (and which was in a way expected as well), we think that the stock and the sector continue to be well placed for 2007. Overall fundamentals remain strong for offshore outsourcing and any improvement in pricing could be a strong driver of consensus earnings, as well as the stock price."

Key F3Q07 Highlights

"Overall volumes rose 7% QoQ in F3Q07, compared to 11% and 9% growth in the preceding two quarters. - Onsite pricing improved marginally by 1.9% and offshore pricing was up 1.7%. Offshore pricing has gradually climbed up for six quarters in a row now and onsite prices for four quarters. The rupee appreciated on average by 3.8% for Infosys during the quarter. We understand that the company has USD 360 million of forward cover outstanding."

"EBIT margin improved by 30 bps sequentially and EBITDA by 60 bps. We believe that the rupee appreciation hurt margins by about 200 bps. Pricing and increased product revenue helped margins by 80 bps each. G&A savings were 50 bps. - The company added 3,282 employees (net) during the quarter to take the total to 69,432. Attrition continued to move higher, up from 12.9% to 13.5%. We understand that the attrition increase, net of involuntary attrition, was about 0.2%."

"The company added 43 new clients in the quarter (versus 45 in F2Q07) and the net addition was 12 (versus seven)."

"Management has guided for 4% QoQ revenue growth and 1.4% earnings growth for F4Q07. It has assumed an average exchange rate of Rs 44.11/USD. F2007 basic EPS guidance has been revised up marginally to Rs 66.63."