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Infosys
Performance highlights
(` cr) Net revenue EBITDA EBITDA margin (%) PAT 3QFY14 13,026 3,620 27.8 2,875 2QFY14 12,965 3,390 26.1 2,626 % chg (qoq) 0.5 6.8 164bp 9.5 3QFY13 10,424 2,970 28.5 2,369 % chg (yoy) 25.0 21.9 (70)bp 21.4
ACCUMULATE
CMP Target Price
Investment Period
`3,549 `3,730
12 Months
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 202,997 (27,440) 0.5 3581/2,190 111,288 5 20,758 6,171 INFY.BO INFY@IN
Infosys, in its 3QFY2014 results, reported operating margins ahead of our expectations, but the top-line came in below our estimates. The key positive surprise in the result was the expansion in the EBIT margin by ~145bp qoq to 25%, while the key negative surprise was a muted volume growth of 0.7% qoq. The company has revised its USD revenue growth guidance for FY2014 to 11.5-12% from 9-10% given earlier, implying a USD revenue growth of 1.4% qoq for 4QFY2014 (to meet the upper end of guidance), which seems attainable. We recommend an Accumulate rating on the stock. Quarterly highlights: For 3QFY2014, Infosys reported a revenue of US$2,100mn, up 1.6% qoq, led by a 0.7% qoq volume growth and 0.7% sequential rise in blended realization. The company posted an EBIT margin growth of 145bp qoq to 25.0%, led by operational efficiency with an inch up in utilization level and sequential decline in selling and marketing (S&M) spends. The PAT for the quarter came in at `2,875cr, up 9.5% qoq, aided by a healthy operating performance as well as higher other income at `731cr as against `510cr in 2QFY2014. Outlook and valuation: The companys Management opined that the global economic environment has improved and looks exciting for the IT services industry. The company expects client budgets to be flat over last year, but expects the business environment to improve gradually. While the improvement in IT spending outlook for CY2014 bodes well for FY2015E in terms of revenue outlook for the sector in general and for Infosys in specific, we believe Infosys will continue to lag behind its tier-I peers such as TCS and HCL Technologies (HCL Tech) on the revenue growth front. Over FY2013-15E, we expect Infosys USD and INR revenue to grow at a CAGR of 12.1% and 19.5%, respectively. The current set of results as well as the given guidance are largely in line with our expectations and factored in the companys stock price, which limits a sharp upside potential in the immediate future. We value the stock at 17.5x FY2015E EPS of `213.3, which gives us a target price of `3,730. We recommend an Accumulate rating on the stock. Key financials (Consolidated, IFRS)
Y/E March (` cr) Net sales % chg Adj. net profit % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2011 27,501 20.9 6,823 9.7 32.6 119.5 29.7 7.4 25.0 25.9 6.8 20.8 FY2012 33,733 22.7 8,315 21.9 31.7 145.5 24.4 6.1 24.9 25.5 5.4 17.0 FY2013 40,352 19.6 9,421 13.3 28.6 164.9 21.5 5.1 23.7 22.5 4.4 15.5 FY2014E 50,545 25.3 10,775 14.4 27.1 184.8 19.2 4.1 21.7 21.8 3.4 12.5 FY2015E 57,612 14.0 12,183 13.1 26.4 213.3 16.6 3.4 20.5 20.4 2.8 10.8
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 15.9 16.2 39.9 28.0
3m 2.4 13.6
Ankita Somani
+91 22-39357800 Ext: 6819 ankita.somani@angelbroking.com
(%)
1QFY14 Onsite
(3.4) 3QFY14
(%)
4 3 2 1 0 3QFY13 4QFY13 1QFY14 Revenue growth (constant currency) 2QFY14 3QFY14 Volume growth 2.0 3.4 3.1 1.2 1.7 0.7
1.8
Service wise, revenue growth was across all service lines with the primary growth driver being Consulting and Systems Integration area of services, the revenues of which grew by 2.0% qoq. Consulting and System Integration is largely discretionary in nature and the Management indicated that the company is seeing some signs of discretionary spending picking up, especially in the US. Infosys has renewed its focus towards traditional IT services to revive growth momentum, which has resulted in business operations continuing with the revenue momentum (though still lagging peers) quarter after quarter. In 3QFY2014, revenues from the Business Operations area of services grew by 1.5% qoq, led by a 5%+ sequential revenue growth in BPO and Testing Services. The company saw good performance in Application Maintenance and Application Development, while revenues from IMS declined qoq in 3QFY2014. Infosys BPO has been performing considerably well since the past few quarters and the Management has indicated at trying to draw ~US$1bn of revenue from it in the next two years from ~US$420mn currently.
% to revenue % growth qoq % growth yoy 61.3 15.9 19.2 6.9 8.7 5.3 3.2 2.1 33.4 5.3 3.8 0.4 1.5 1.0 2.2 (2.6) 5.3 5.6 (1.4) (7.2) 2.0 1.6 4.4 1.6 8.9 10.6 5.5 9.9 13.8 12.0 9.9 (3.8) 12.6 5.9 7.1 46.6
Industry-wise, the revenue from Financial Services and Insurance (FSI), the companys anchor vertical contributing 33.5% to revenue, grew by 2.0% qoq, led by a 2.0% qoq growth in revenue of Banking and Financial Services. In CC terms, revenue from FSI grew by 1.5% qoq. The spending by banks and financial institutions is coming for work related to risk compliance, cost cutting, customer-centric applications, cloud and risk management. Also, the company is witnessing pricing challenges in this industry vertical in some of the large commoditized deals that are coming in. The Manufacturing industry vertical (contributed 22.8% to revenue) registered a 0.1% qoq decline in revenues. In CC terms, the revenue from this vertical declined by 0.3% sequentially. The company is seeing IT spending coming in the Manufacturing industry segment from clients in terms of work related to harmonizing processes and transformation to gain cost efficiency and simplicity. The Management indicated that traction in Manufacturing sub-segments such as aerospace and auto is good for services like digitization, expansion and connected vehicles while the company expects budgets to decline for the hi-tech industry segment. The Retail, CPG and Logistics (RCL) segment (contributed 24.6% to revenue) reported a 3.3% qoq revenue growth and emerged as the primary growth driver for the company. Revenues from Retail & CPG and Life Sciences grew by 3.6% and 10.5% qoq, respectively. In CC terms, the revenue from RCL grew by 2.9% qoq. Infosys possesses strong capabilities in the Retail & CPG segment and the Management indicated that the spending in this space is coming for work related to cloud, analytic, IMS and ERP related transformation practices. Also, the company is witnessing pricing challenges in this industry vertical in some of the large commoditized deals that are coming in. The Management indicated that budgets are expected to be under pressure for next year in the Life Sciences industry vertical. The Energy Utilities, Communications & Services (ECS) segment (contributed 19.1% to revenue) reported a 1.1% qoq increase in its revenue with 3.6% qoq growth in revenues from Energy & Utilities. Revenues from Communication & Services
January 10, 2014
industry declined by 3.3% qoq. In CC terms, revenue from this segment grew by 0.3% qoq. In Energy and Utilities, the Management indicated that barring oil and few utility companies, growth will remain subdued in the near-term. In Communication & Services, the Management indicated at IT spend in the telecom industry vertical to continue to remain challenged on discretionary as well as nondiscretionary sides of the business.
% to revenue 33.5 27.2 6.3 22.8 24.6 16.0 1.6 5.0 2.0 19.1 5.2 7.9 6.0
% growth qoq 2.0 2.0 1.6 (0.1) 3.3 3.6 (9.6) 10.5 (3.2) 1.1 3.6 (3.3) 5.2
% growth yoy 9.3 11.6 0.4 15.5 12.2 9.9 (2.3) 14.5 46.6 2.4 5.8 (9.5) 19.9
In terms of geographies, although revenue from North Americas came in weaker than expected at -0.8% qoq (CC terms), strong growth in Europe (+3.5% qoq CC terms) and RoW (+5.2% qoq CC terms) resulted in healthy overall growth.
(%)
6.5
5.0
5.2
With the company focusing on improving its utilization level, the utilization rate including as well as excluding trainees, grew by 40bp and 20bp qoq to 74.1% and 78.0%, respectively.
(%)
3QFY14
Margins expand
Infosys operating margins have been a concern since the last six quarters. But during 3QFY2014 the company posted a whopping 145bp qoq growth in EBIT margin to 25.0%, led by operational efficiency with inch up in utilization level to 74.1% (73.7% in 2QFY2014) and sequential decline in S&M spends. Selling, General and Administrative (SG&A) spend as a percentage to sales declined by 65bp sequentially to 11.1%. The company expects margins to stabilize around the current levels in the medium to long term.
26
25
(BP)
(66)
23.6
23
Client pyramid
Infosys added 54 new clients (gross additions) during the quarter, taking its total active client base to 888. The company witnessed addition of one client in US$300mn+ revenue bracket. Overall, the company added 26 clients in US41mn+ revenue brackets. The companys growth during the quarter was led by non top-10 clients which grew by 3% qoq. Revenues from the top 5/10 clients declined by 4.5%/2.5% qoq, respectively, which the Management indicated as a one-off thing. A 3% qoq growth in ex-top 10 clients suggests ramp up of new deal wins.
US$300mn plus
Source: Company, Angel Research
(%)
24
Investment arguments
Guidance revised upwards: Infosys has revised its USD revenue growth guidance for FY2014 to 11.5-12% (our expectation was of 11-12%) from 9-10% given
earlier, implying a 1.4% qoq USD revenue growth in 4QFY2014 (to meet the upper end of guidance) which seems attainable as currently we were factoring Infosys to clock a ~2.2% qoq USD revenue growth in 4QFY2014. In INR terms,
the company has given a revenue guidance of 24.4-24.9% (assuming USD/INR rate at `61.81). The Management opined that 2H is traditionally soft for Infosys and that is the reason it is cautiously optimistic for the next quarter. We believe a healthy 1HFY2014 performance increases the probability of beating the top end of the guidance. Deal pipeline healthier: The Management commentary indicated that though the deal pipeline seems to be better than what it was the same time last year, the company continues to remain focused on reviving growth momentum. Also, the company is witnessing sporadic pricing pressure in large deals coming in re-bid market space because of competitive intensity. While the improvement in IT spending outlook for CY2014 does bode well for the FY2015E revenue outlook of the sector in general and Infosys in specific, we believe Infosys will continue to lag behind its tier-I peers like TCS and HCL Tech on revenue growth. We expect Infosys to post an 11.5% USD revenue growth in FY2014. Over FY2013-15E, we expect USD and INR revenue to grow at a CAGR of 12.1% and 19.5%, respectively. Operating margin likely to be range bound: The Management maintained its stance that the company is right now focused on growth (at least for the next couple of quarters) and this may lead to sacrifice in margins in the near term. The operating margin is subject to tailwinds on a stable rupee, further improvement in utilization rates and cost optimization drive running in the company, but it currently faces headwinds because of pricing pressure seen for traditional IT services and higher S&M spends. The company still has headroom to increase its utilization level by ~300bp to be comparable with peers and this, in turn, will assist in increasing operating margins further. Going ahead, we expect the EBIT margin of Infosys to improve moderately in 4QFY2014 and land at 24.1% for FY2014. But given a stable rupee, higher S&M spends, and wage hikes in FY2015, we expect the EBIT margin to decline to 23.7% in FY2015. Over FY201315E, we expect an EBIT CAGR of 14.3%.
We believe that the impact of the current high level exits could be felt in the medium term. However, a company like Infosys is system driven with a healthy management bandwidth and hence the impact will not be long lasting. With Infosys valuations at a 25% discount to TCS, we believe there is scope of a re-rating if and when things turnaround decisively. The current set of results as well as guidance given is largely in line with expectations and factored in the stock, which limits a sharp upside potential in the immediate future. At the CMP of `3,550, the stock is trading at 19.2x and 16.6x its FY2014E and FY2015E EPS, respectively. We value the stock at 17.5x FY2015E EPS of `213.3, which gives us a target price of `3,730. We recommend an Accumulate rating on the stock and believe that the companys initiatives will lead to restoring the predictability and consistency in the performance going ahead. Downside risks to target price: - INR strengthening, continued management attrition and US immigration bill
(`)
Oct-08
Oct-11
Jan-08
Jan-11
Apr-07
Apr-10
Price
Source: Company, Angel Research
26x
22x
18x
14x
Apr-13
10x
Jan-14
Jul-09
Jul-12
Company Background
Infosys is the second largest IT company in India, employing over 1,58,000 professionals. The company services more than 850 clients across various verticals, such as financial services, manufacturing, telecom, retail and healthcare. Infosys has the widest portfolio of service offerings amongst Indian IT companies, spanning across the entire IT service value chain - from traditional Application Development and Maintenance to Consulting and Package Implementation to Products and Platforms.
10
11
12
13
Key ratios
Y/E March Valuation ratio (x) P/E P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value DuPont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/sales) Asset turnover ratio (sales/assets) Leverage ratio (assets/equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days 3.6 78 4.2 84 3.7 86 4.4 78 4.7 78 25.9 56.1 25.0 25.5 56.3 24.9 22.5 45.8 23.7 21.8 49.2 21.7 20.4 49.2 20.5 0.7 1.1 0.3 0.9 1.1 25.0 0.7 1.2 0.3 0.9 1.1 24.9 0.7 1.2 0.3 0.9 1.2 23.7 0.7 1.2 0.2 0.9 1.1 21.2 0.7 1.2 0.2 0.9 1.1 20.5 119 134 35 477 146 162 15 585 165 184 42 696 185 213 47 870 213 240 47 1038 29.7 26.4 7.4 1.0 6.8 20.8 6.0 24.4 22.0 6.1 0.4 5.4 17.0 4.7 21.5 19.3 5.1 1.2 4.4 15.5 3.9 19.2 16.7 4.1 1.3 3.4 12.5 3.0 16.6 14.8 3.4 1.3 2.8 10.8 2.5 FY2011 FY2012 FY2013 FY2014E FY2015E
14
E-mail: research@angelbroking.com
Website: www.angelbroking.com
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Infosys No No No No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
15