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STOCK UPDATE Infosys
Cluster: Evergreen
Recommendation: Hold
Price target: Rs2,440
Current market price: Rs2,403 Price target revised to Rs2,440 Result highlights -
Lackluster performance, disappointing guidance: Infosys' has reported lackluster numbers for Q4FY2012, missing its revenue guidance (revenue declined by 1.9% quarter on quarter [QoQ] against our estimate of a 0.9% rise). For FY2013 also, the company's management has given a disappointing guidance of an 8-10% revenue (US dollar terms) growth for FY2013. The weak guidance upset the Street and the same was reflected in the 12.6% correction in the company's stock price post the announcement of the results.
For Q4FY2012, the revenues were down 1.9% to $1,771 million, with the blended volume down 1.5% sequentially while pricing declined 1.1%. The shortfall in revenues can largely be attributed to ramp down from some clients in the banking financial services and insurance [BFSI] space in North America and due to delays in anticipated ramp ups during the quarter.
In INR terms, revenues were down 4.8% to Rs8,852 crore, whereas the EBITDA margin declined 110bps QoQ to 32.6% on account of an appreciation in the rupee (realisation down by 2.9% QoQ) coupled with a drop in the utilisation rate by 570bps to 73%. The net other income was up by 54.5% QoQ to Rs652 crore (interest income was up by 37% QoQ to Rs584 crore). The net income was down by 2.4% QoQ to Rs2,316 crore. For FY2012, the revenues were up by 22.7% year on year (YoY) to Rs33,734 crore and net income was up by 21.9% to Rs8,316 crore. During the quarter the company has added 52 new clients and won 5 large deals and 7 business transformation deals, out of which 3 deals are worth more than $100 million. -
Guidance disappoints, management warns of challenges ahead: For FY2013, Infosys has guided for an 8-10% revenue growth and 4-5.7% net profit growth in US dollar terms. The revenue growth guidance fell well short of the Street's expectations and Nasscom's guidance of a 11-14% growth. Further, the company's management has also warned of an uncertain macro environment and a cautious spending pattern of clients (to be more visible in the BFSI space who are among the top clients), which has restricted its optimism on growth. Nevertheless, we believe Infosys' weak revenue guidance is more a reflection of company specific issues rather than secular sectoral concerns. -
Valuation and view: Client specific issues and lower than anticipated ramp up in the projects has led to Infosys missing the upper end of revenues guidance for a third consecutive quarter. The company has refrained from giving an optimistic growth forecast owing to multiple issues and an uncertain macro environment. We have downgraded our estimates for FY2013 and consequently reduced our target multiple on the stock from 17x to 15x based on FY2013 earnings estimates to factor in a lower growth and volatility in earnings. Although the stock has already corrected by 12.6% post the results, we do not see any major upside trigger for the stock in the near to medium term. We maintain our Hold rating on the stock with a revised price target of Rs2,440. We continue to maintain our preference for Tata Consultancy Services (TCS) over Infosys.
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