Buy Infosys; target of Rs 3393: BP Equities

“Infosys Technologies, revenue in US$ terms grew 1.1% Q-o-Q and 23.6% Y-o-Y to US$ 1.6 bn in Q4 FY11, aided by ~2% Q-o-Q improvement in blended pricing offset by 0.9% Q-o-Q de-growth in volumes and significant fall utilization rates. Total Revenues stood at Rs 72,500 mn up 2.0% Q-o-Q and 22.0% Y-o-Y. Net profits grew 2.1% Q-o-Q and 13.6% Y-o-Y as against our estimate of 6.6% Q-o-Q growth. Operating margins declined 122 bps Q-o-Q and 110bps Y-o-Y to 29.0% due to lower utilization rates and rising employee cost offset by higher pricing and favorable currency. EPS grew 2.1% Q-o-Q and 13.6% Y-o-Y to Rs 31.8 in the quarter.”

“BFSI grew 0.6% Q-o-Q, Retail and Manufacturing grew 2.0% and 6.2% sequential in the quarter. US witnessed muted growth of 0.4% Q-o-Q after witnessing growth in the last few quarter. India and ROW outperformed with 25.2% and 3.8 % Q-o-Q growth respectively, which we expect to be future growth drivers. Rise in Application development and system integration revenues confirm rise in discretionary spending which we think will be strong in FY12 driving top-line. The company added 8,930 employees on Gross basis while net additions stood at 5,889. Lateral hiring were around 3,591 and LTM attrition rate stood at 17.0% in the quarter vs. 17.5% in Q3 FY 11. Management expects revenues in the range of US$ 7.13-7.25 bn up 18-20% Y-o-Y which is in line with expectations but EPS guidance of Rs 126.05-128.21 up 5.5-7.3% Y-o-Y is much below expectations, based on higher operating margin contraction of ~300bps Y-o-Y. For Q1 FY12E company expects top-line of Rs 73.11-73.82 bn( up 0.8-1.8% Q-o-Q) and EPS of Rs 27.59-28.02( down 13.3- 11.9% Q-o-Q). The company expects to add around 45K employees (gross basis) in FY12E as compared to ~43K employees added in the previous year.”

“We expect the company to grow 20.2% and 22.0% Y-o-Y (vs 25.9% and 20.0% Y-o-Y) to Rs 330.5 bn and Rs 403.0 bn in FY12E and FY13E respectively. We assume margins to decline ~150 bps Y-o -Y in FY12E to 28.0% (as against management expectation of 300bps decline). In view of strong demand for IT services, company’s investment in business, robust hiring, uptick in pricing, we maintain our “BUY” rating on the stock despite margin declines and currency appreciation. We revise our price target to Rs 3393 (20x times FY13 earnings) from Rs 3470 earlier. The company now trades at a P/E of 20.8x and 17.1x FY12 and FY13 earnings,” says BP Equities research report.

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