Infosys 1QF13 Result Review I TP: Rs2,650 I Rating: ADD
Misses on multiple fronts, valuations give comfort
Infosys reported revenues lower by 1.1% QoQ of US$1,752mn for 1QF13 (US$1,763mn in constant currency), below SSLe of US$1,771mn and also missed the lower-end of its guidance for the second consecutive quarter. The company has taken a one-off hit due to a writeoff of accrual revenues worth US$15mn because of the cancellation of a transformation project of a European client in the E&U vertical this quarter. Volumes grew 2.7% QoQ. Reported realisation de-grew 3.7% QoQ (de-grew 3.2% in cc). Despite sharp rupee depreciation QoQ, EBIT margins declined ~190bps QoQ due to declines in realisations and utilisation, onsite hiring and visa costs. The company has discontinued its quarterly guidance for the time-being and lowered its F13 revenue growth guidance to 5% (vs. earlier 8-10%).
EBIT margins decline as realisations take a hit: Despite sharp rupee depreciation , operating margins declined ~190bps qoq on account of decline in realisation (3.7% QoQ), drop in utilisation (120bps QoQ), onsite hiring (~700 employees) and visa costs (~60bps impact). The company hinted at sporadic pricing re-negotiations, largely from the BFSI vertical. However, the management maintained a stable pricing outlook.
Despite reducing guidance, questions marks remain: The F13 guidance of at least 5% growth implies CQGR of ~3.1% over 2Q-4Q and a volume growth of ~9% YoY, taking into account a sharp pricing decline in 1Q. The company has gone ahead with ~20,000 promotions and progressions w.e.f. 1st Jul, and the decision to forego wage hikes may be revisited in Sep / Oct. Challenges such as lack of visibility in spending, decline in velocity of decision-making and uncertainties contributed by some ramp-downs, slower ramp-ups and higher scrutiny in long-term investments and transformational / discretionary projects remain.
Valuation: The deteriorating prospects of top-line growth in F13 have been a result of softness in discretionary spending, slow ramp-ups and even ramp-downs in certain projects, and now pricing declines as well. We are revising our EPS estimate for F13e/F14e by -0.8/-1.0% to Rs164.9/176.5, owing to (a) 1QF13 results, (b) decline in realisations, (c) lower US dollar revenue expectations and (d) weaker Rupee assumptions. Considering reasonable valuations, we maintain an ADD recommendation with a target price of Rs2,650 at 15x (earlier 16x) F14e earnings.