| Summary of Contents PULSE TRACK
STOCK UPDATE Infosys Technologies
Cluster: Evergreen
Recommendation: Hold
Price target: Rs3,461
Current market price: Rs3,070 Price target revised to Rs3,461 Result highlights -
Earnings better than expectations but lacked positive surprise: Infosys Technologies (Infosys) reported a strong performance for Q2FY2011, with a 16.7% quarter on quarter (QoQ) growth in net profit to Rs1,737 crore, which was ahead of our expectation of growth of 15.7%. The company?s management has indicated at a strong resurgence in the demand environment with large deals coming back to the table in the first half of FY2011. Infosys won nine large transformational deals and nine global sourcing deals, with a total contract value of $865 million. However, the management voiced some caution mainly pertaining to regulatory changes in the US economy and the uncertainties related to currency volatility which could impact the earning performance in the medium term. Overall, we believe the earning performance for the quarter was quite impressive on the top line front; however it lacks any positive surprise that was needed to cheer the market mood. The one time dividend of Rs30 per share announced by the company is lower than what the market had expected. -
Impressive top line growth: Infosys? Q2FY2011 top line growth is better than the Street?s as well as our expectations. For Q2FY2011, in US dollar terms, Infosys reported a revenue growth of 10.2% QoQ to $1,496 million, aided by a 7.2% volume growth and 2.8% pricing uptick. There was also a 0.74% contribution coming from favorable cross currency tailwinds. In Indian rupee terms, revenues were up 12.1% to Rs6,947 crore. In the last four preceding quarters, Infosys reported an average volume growth of 6.5%, which is testimonial to strong improvement in the demand cycle. -
Margins rebound, in line with expectations: Earnings before interest, tax, depreciation, and amortisation (EBITDA) margins for the quarter under review expanded by 170 basis points sequentially to 33.3%, which was in line with our expectations. The margin expansion was led by employee productivity, which improved by 3.2% QoQ on reported currency coupled with an increase in utilisation (250 basis points QoQ) and favourable impact of currency tailwinds. Going forward, the management has indicated at a margin decline of 130 basis points for FY2011, largely on account of currency headwinds. -
Impressive guidance upgrade in US dollar terms; EPS guidance remains intact in Indian rupee terms: On the back of improved business visibility and strong traction in the industry verticals, Infosys has increased its revenue growth guidance in US dollar terms to approximately 24-25% from the earlier guidance of approximately 19.1-20.9%. However, a sharp appreciation in the rupee vis-?-vis the US dollar in the last one month (close to 5%) has impacted the earning per share (EPS) guidance for FY2011, which remains largely unchanged at Rs117. Infosys has taken in to account a rupee-dollar exchange rate of Rs44.5 for FY2011E as compared to the earlier Rs46.5, which is a decline of 4.3%. Nevertheless, we expect Infosys to surpass its EPS guidance for FY2011 on the back of better volume visibility and stable pricing coupled with its impressive margin management mechanism. -
Upward tweak on estimates: Reason for a change in estimates -
On the back of a sharp appreciation in the rupee vis-?-vis the US dollar in the last one month, we have revised our exchange rate assumption (Rs45.5 for H2FY2011 and Rs44 for FY2012). -
With strong resurgence in the demand environment and strong hiring numbers, we have increased our volume estimates for FY2011E and FY2012E. -
Increase in tax rates from 25% to 26% for FY2011E and FY2012E. -
Consequently, we have revised our EPS estimate to Rs150.5 from the earlier Rs143.7 for FY2012E. For FY2011E, we have maintained our EPS estimate of Rs122.6, however we have increased our revenue estimates by 4.6% to Rs27,747.2 crore ($6,135.4 million) from the earlier Rs26,528 crore. -
Maintain Hold with revised price target of Rs3,461: At the current market price of Rs3,070, the stock trades at 25x FY2011E and 20x FY2012E earnings. We have revised upward our target price to Rs3,461 from the earlier Rs3,160 on account of an upward revision in our EPS estimate for FY2012. At our target price, the stock will be valued at 23x FY2012E earnings.
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