Buy Infosys; target of Rs 3145: BP Equities

“Infosys, revenue in US$ terms grew 3.4% Q-o-Q and 13.9% Y-o-Y to US$ 1.81 bn (exactly in line against our expectation of US$1.81 bn), aided by 3.1% Q-o-Q improvement in volumes and 0.8% improvement in pricing. Total Revenues stood at Rs 92,980 mn up 14.8% Q-o-Q and 30.8% Y-o-Y. Net profits grew 24.4% sequentially and 33.3% Y-o-Y. Operating margins expanded 301 bps q-o-q and 96 bps yo- y to 31.2% primarily due INR depreciation (contributed 440 bps) offset 139 bps due to incremental incest in business. EPS grew 33.3% Y-o-Y and 24.4% Q-o-Q to Rs 41.5.”

“BFSI revenues grew 14.8% Q-o-Q and contributed 35.3% to revenues almost flat. Healthcare & Manufacturing contribution grew 130 bps and 80 bps Y-o-Y to 5.9% and 20.4% respectively. Retail grew 37.2% y-o-y and contributed 15.2% to revenues. Europe contribution expanded 210 bps q-o-q to 22.6% and management believe that level of outsourcing activity to increase faster in the region. Overall management remains cautious about long term spending commitments from clients and remains cautious with some cuts in discretionary spending. The company added 9,655 employees on Gross basis while net additions stood at 3,266. Lateral hiring were around 3,863 and LTM attrition rate stood at 15.4% in the quarter vs.15.6% in Q2 FY12. Management has slightly cut its FY12E US$ revenue guidance to 16.4% y-o-y growth from 17.1- 19.1% y-o-y growth earlier, primarily to adjust cross currency fluctuations and flat fourth quarter. EPS guidance for FY12E (in Rs terms) has been risen to Rs 147.13 up 23.2% Y-o-Y from Rs 143.0-145.3 earlier as the company expects rupee to be weak in the coming quarter. For Q4 FY12E company expects a top-line of US$ 1,806-1,810 mn which is almost flat sequentially. We are pretty disappointed with forth quarter guidance that the company has given despite big deal wins and strong clients additions in the quarter. However, we don’t see any significant cuts in client budgets going forward and expect volumes growth to be ~15% for FY13E. We expect ~10K employees additions (gross basis) in Q4 FY12E and ~45K employees for FY12E, while expect utilization to be in the range of 75%-80%.”

“We expect the company top line to grow 24.9% and 18.4% Y-o-Y to Rs 343.5 bn and Rs 406.6 bn in FY12E and FY13E respectively. We expect volumes growth in tune of 15% for FY13E and pricing to remain stable going forward. We estimates revenues in US$ to come in at $7.04 bn for FY12E and $8.03 bn for FY13E We assume margins to remain more or less flat at 29.4% for FY12E and 29.6% for FY13E. In view of stronger recovery in US, no significant budget cuts from clients, company’s investment in business, robust hiring, uptick in pricing and focus on quality business we maintain our “BUY” rating on the stock despite prevailing uncertainty in the west and volatile currency movements. We lower our target price to Rs 3,145 (18x FY13 earnings) from Rs 3,304 earlier. The company now trades at a P/E of 17.6x and 14.8x FY12 and FY13 earnings,” says BP Equities research report.

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