Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)

Recommendation HOLD Results broadly in line with expectations

CMP (15/10/2010) Rs. 3076
Sector IT & Software • Infosys’ Q2 FY11 revenues grew 12.1% QoQ to Rs.6947 Crs
beating its guidance of Rs.6626 on the back of improving
Stock Details
demand. Revenue was above our estimates because of
BSE Code 500209 higher volumes & an increase in pricing during the quarter.
NSE Code INFOSYSTCH • EBITDA margin improved to 33.3%. (+167 bps QoQ) The
Bloomberg Code INFO IN increase in topline was reflected in the improved EBITDA
Market Cap (Rs. cr) 1,76,581 margins.
Free Float (%) 85% • PAT increased by 16.7% QoQ to Rs. 1737 in Q2 FY11 because of
52- wk HI/Lo 3249.0/2127.1 improvement in the EBITDA margin and foreign exchange
gains. PAT exceeded our estimate reflecting higher-than-
Avg. volume BSE (Quarterly) 96107
expected revenues.
Face Value Rs.5.00
Dividend (FY 2010) 300% Particulars (Rs. Crs) NBS estimate Actual Variation
Shares o/s (No.) 57.14 Crs Revenues 6,652 6,947 4.4%
Relative Performance 1Mth 3Mth 1 Yr PAT 1,655 1,737 4.9%
Infosys 0.85% 11.50% 38.84%
Sensex 3.19% 12.37% 17.04% • Volumes witnessed a growth of 7.2% QoQ while pricing
4000 30000
increased by approximately 3.2% in dollar terms.
• Gross addition of employees stood at 14,264 in Q2 FY11 as
3000
20000 compared to 8,859 in Q1 FY11. Company plans to hire
2000 40,000 employees in FY 2011 to manage the increased
1000
10000 attrition rate and build capacity for higher growth.
• Revenue share of fixed price contracts increased by 90 bps
0 0
QoQ and the utilization rate improved by 130 bps QoQ
Oct-09 Feb-10 Jun-10 Oct-10
Infosys SENSEX
Valuation and Recommendation
Shareholding Pattern as of 30/09/2010 At the current price of Rs.3076, Infosys is trading at a PE of
Promoters Holding 25.34x on FY 2011 EPS & 21.66x on FY 2012 estimated EPS.
16.04%
Institutional (Incl. FII) 43.73% Based on our estimated EPS of Rs. 142.02 for FY 2012 and our
Corporate Bodies 6.38% target PE multiple of 22.0x we arrive at a target price of Rs.3125
per share for Infosys. Therefore, the company looks fairly valued
Public & others 33.85%
at current levels and doesn’t offer much upside from current
Ashish Khetan, Research Analyst (+91 22 3027 8201) levels in near term. Considering the improved scenario for the IT
ashish.khetan@nirmalbang.com sector, we recommend to HOLD the stock.
Niraj Garhyan, Research Associate (+91 22 3027 8215)
niraj.garhyan@nirmalbang.com
Net Sales Rs Growth EBITDA Rs Margin PAT
Year EPS PE P/BV ROE %
Crs % Crs % Rs Crs
FY 2009A 21693 30.0% 7195 33.17% 5988 104.43 29.46 7.69 37.4%
FY 2010A 22742 4.8% 7969 35.04% 6376 111.18 27.67 7.13 30.9%
FY 2011E 27599 21.4% 9220 33.41% 6936 121.39 25.34 5.73 27.7%
FY 2012E 33295 20.6% 11006 33.06% 8114 142.02 21.66 4.63 27.3%
Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)
Quarterly Performance

• Infosys Q2 FY11 revenues grew 12.1% QoQ to Rs.6947 Crs

above the management guidance. The growth in top-line in Q2
FY11 was driven by strong volume growth (7.2% QoQ), a 3.2%
increase in pricing, higher utilization rates and a greater share
of onsite business.
• EBITDA grew 18% QoQ to Rs. 2315 Crs in Q2 FY11 reflecting the
growth in top-line. EBITDA margin improved 167 bps QoQ in Q2
FY11 on the back of increased in top-line, improved pricing and
higher utilization rate.
• Net margin increased by 100 bps to 25.0% reflecting the
improvement in the EBITDA margin and higher other income
due to foreign exchange gains.
• Infosys reported a diluted EPS of Rs. 30.40 in Q2 FY11 which
was significantly higher than its guidance.
• Infosys declared an interim dividend of Rs.10/share and a 30th
year special dividend of Rs.30/share

Consolidated in Rs Crs Q2 FY11 Q1 FY11 QoQ Q2 FY10 YoY

Income 6,947 6,198 12.1% 5,585 24.4%
Software development expenses 3,754 3,441 9.1% 2,970 26.4%
Gross profit 3,193 2,757 15.8% 2,615 22.1%
GP Margin 46.0% 44.5% 148 bps 46.8% -86 bps
SG&A Expenses 878 795 10.4% 689 27.4%
EBITDA 2,315 1,962 18.0% 1,926 20.2%
EBITDA Margin 33.3% 31.7% 167 bps 34.5% -116 bps
Interest 0 0 0
Depreciation and amortization 217 207 4.8% 233 -6.9%
Op profit after Int & Dep 2,098 1,755 19.5% 1,693 23.9%
Other income 267 239 11.7% 239 11.7%
Provision for investments 0 0 0
Profit before tax (PBT) 2,365 1,994 18.6% 1,932 22.4%
Provision for taxation 628 506 24.1% 397 58.2%
Net profit after tax (PAT) 1,737 1,488 16.7% 1,535 13.2%
Exceptional items net of taxes 0 0 0
Adjusted PAT 1,737 1,488 16.7% 1,535 13.2%
PAT Margin 25.0% 24.0% 100 bps 27.5% -248 bps
Adjusted EPS Diluted 30.40 26.05 16.7% 26.83 13.3%
Source: Company data, Nirmal Bang Research
Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)
As per IFRS GAAP
Consolidated figs in US$ mn Q2 FY11 Q1 FY11 QoQ Q2 FY10 YoY
Revenue 1,496 1,358 10.2% 1,154 29.6%
Gross Profit 641 558 14.9% 492 30.3%
Margin 42.8% 41.1% 176 bps 42.6% 21 bps
Operating Profit 452 384 17.7% 350 29.1%
Margin 30.2% 28.3% 194 bps 30.3% -12 bps
PBT 509 437 16.5% 399 27.6%
PAT 374 326 14.7% 317 18.0%
Margin 25.0% 24.0% 99 bps 27.5% -247 bps
Diluted EPS 0.65 0.57 14.0% 0.56 16.1%
Source: Company data, Nirmal Bang Research

In US dollar terms revenues increased 10.2% QoQ, much higher than

the growth witnessed in Q1 FY11. Net margin improved by 99 bps in
Q2 FY11 at 25.0% and the diluted EPS stood at US$ 0.65.
Guidance
Management has increased its guidance for top-line growth from 19-
21% to around 24-25% for FY 2011 in US dollar terms. This is primarily
due to improving demand scenario for offshore IT spending. The
company is seeing an improving traction from its US clients as well as
an uptick in demand in Europe. In rupee terms, management has
guided for an annual revenue growth of 18.5-19.4% for FY 2011
compared to earlier guidance of 16.3-18.2%. The company is
conservative on its revenue guidance in rupee terms because of the
currency volatility witnessed over the past couple of months. The
revised rupee guidance is based on the exchange rate of 1 US$ = Rs.
44.50 as while the previous guidance was based on a rate of 1 US$=
Rs. 46.45.
In US dollar terms, Management expects EPS to increase 10.4-12.2%
in FY 2011. Management is expecting a decline in net margin in FY
2011 by around 260 bps primarily due to cross currency movements
and increased tax liability. Also, it intends to hire around 40000
employees in FY 2011 and promote around 12,000 employees across
levels in Q3 FY11. This will have further negative impact on margins.
Yrly Guidance Rs.in Cr US $ million
FY 2011 Earlier Revised Earlier Revised
Revenue 26441-26885 26951-27165 5720-5810 5950-6000

Adj.EPS 112.21-116.73 115.07-117.07 2.42-2.52 2.54-2.58

Source: Company data
Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)
Management expects an increase of 3.9% QoQ in the revenues for Q3
FY11 in dollar terms and a marginal decline of -0.4% QoQ in rupee
terms in Q3 FY11. The management expects the rupee to remain
strong in near term, which will put pressures on revenues & margins
in rupee terms. Profitability is expected to decline due to increase in
employee costs, cross currency volatility and increase in tax liability.

Rs in Crs US$ mn
Quarterly Q2 FY11 Q3 FY11 Var % Q2 FY11 Q3 FY11 Var %
Guidance Actual Guidance Actual Guidance
Revenue 6947 6884-6953 -0.4% 1496 1547-1562 3.9%

Adj.EPS 30.41 29.37-29.89 -2.6% 0.65 0.66-0.67 2.3%

Source: Company data

Aggressive hiring plans

Infosys had a record addition of 14264 employees in Q2 FY11 as

compared to 8859 in Q1 FY11. Net addition of employees was 7646 in
Q2 FY11. Going forward, Management expects to add 11000
employees in Q3 FY11 and has increased the hiring target for FY 2011
to 40,000 from the earlier plans of addition of 36000 employees.
These aggressive hiring plans indicate that company is gearing up for
the anticipated uptick in demand from developed economies. The
salary hikes, bonuses and promotions doled out by the company has
enabled it to reduce the attrition rate in Q2 FY11 on a sequential
basis. On an absolute basis, attrition was down by 1215 resources in
Q2 FY11.

QoQ increase in Client Addition

60 49
47 47
50 40 40 38
37 35
40 30 32
27 27
30
20
10
0
Q3 FY08

Q4 FY08

Q1 FY09

Q2 FY09

Q3 FY09

Q4 FY09

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

The Client addition in Q2 FY11 stood at 27 as compared to 38 in Q1

FY11. During 1H FY2011, Infosys has signed 9 transformational deals.
Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)
Volumes and Pricing in Q2 FY11

10.0% 4.0%
8.0% 2.0%
6.0% 0.0%
4.0% -2.0%
2.0% -4.0%
0.0% -6.0%
-2.0% -8.0%
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
FY09 FY09 FY09 FY10 FY10 FY10 FY10 FY11 FY11
Volume growth Inc / Dec in Pricing

Volumes witnessed a growth of 7.2% QoQ which was

marginally lower than the growth of 7.6% achieved in Q1
FY11. Pricing increased by around 3.2% in dollar terms and
2.5% in constant currency terms. Going ahead the company
sees stronger volume growth with greater traction in
financial services and retail and expects prices to remain
stable as not much renegotiations underway. This is
expected to boost the top-line going forward.

Revision in Estimates

• We have revised our sales estimates upwards for FY 2011 and FY 2012
to reflect better-than-expected improvement in demand scenario and
higher pricing achieved by the company which is expected to remain
firm.
• PAT estimate are revised marginally upwards for FY 2011 to reflect the
upward revision of revenues partially offset by upward revision in
salary and wages.

Particulars FY 2011 FY 2012

Previous Revised Previous Revised
Estimates Estimates Variation Estimates Estimates Variation
Sales 26,896 27,599 2.6% 31,981 33,295 4.1%
PAT 6,774 6,936 2.4% 7,842 8,114 3.5%
Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)
Valuation & Recommendation

The Q2 FY11 results reflect the improvement in the recovery of demand from
the US and the Europe. The company is seeing an improved traction in Retail,
BFSI and Energy & Utility verticals among its US clients. Also, Europe is
witnessing an uptick in demand with an incremental spending in
Manufacturing, BFSI and Retail segments. In Europe, manufacturing has shown
a healthy growth particularly in Switzerland, Germany and France as
companies attempt to achieve cost efficiency through better systems. During
the quarter, growth was led by Retail segment where in Infosys caters to 8 out
of the top 10 retailers in US and 5 out of the top 10 retail companies in Europe.
The company has won 9 transformational which few are in excess of US$100
mn. Attrition has declined on a sequential basis, but it still remains a concern
and Infosys plans to hire around 40,000 employees during FY 2011 to build up
capacity in expectation of an increased demand in future. Overall, the
Management remains optimistic in short term and have a cautious view over
the long term as budgets for FY 2012 are yet to be finalized. The exchange rate
remains a major concern as the recent appreciation of rupee will impact the
company’s profitability in near term.

At the current price of Rs.3076, Infosys is trading at a PE of 25.34x on FY 2011

EPS & 21.66x on FY 2012 estimated EPS. Based on our estimated EPS of Rs.
142.02 for FY 2012 and our target PE multiple of 22.0x we arrive at a target
price of Rs.3125 per share for Infosys. Therefore, the company looks fairly
valued at current levels and doesn’t offer much upside from current levels in
near term. Considering the improved scenario for the IT sector, we
recommend to HOLD the stock.
Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)
Financials
Profitability (Rs. In Cr) FY09A FY10A FY11E FY12E Financial Health (Rs. In Cr) FY09A FY10A FY11E FY12E
Revenues 21693 22742 27599 33295 Share Capital 286 286 286 286
% change 30.0% 4.8% 21.4% 20.6% Reserves & Surplus 17968 22763 26344 31768
EBITDA 7195 7969 9220 11006 Deferred Tax Liabilities 37 232 232 232
% change in EBIDTA 37.4% 10.8% 15.7% 19.4% Net Worth 18291 23281 26862 32286
Interest 0 0 0 0 Total Loans 0 0 0 0
EBDT 7195 7969 9220 11006 Total Liabilities 18291 23281 26862 32286
Depreciation 761 906 877 943 Net Fixed Assets 5354 5355 5567 5983
Other Income 473 946 1099 1183 Investments 0 3712 3712 3712
Extraordinary 0.0 48.0 0.0 0.0 Deferred Tax Assets 163 432 432 432
PBT 6907 8057 9442 11247 Sundry Debtors 3672 3494 4293 5272
Tax 919 1681 2506 3149 Cash & Bank 9695 10556 13692 17640
PAT 5988 6376 6936 8098 Loans & Advances 3279 4187 4692 5660
Adj PAT 5988 6424 6936 8098 C A L&A 16646 18237 22677 28572
Shares o/s ( No. in Cr.) 57.3 57.3 57.1 57.1 CL & P 3872 4455 5526 6414
EPS 104.42 111.18 121.39 141.73 Working Capital 12774 13782 17151 22158
Adj EPS 104.42 112.02 121.39 141.73 Misc Exp 0 0 0 0
Cash EPS 117.69 126.98 136.74 158.23 Total Assets 18291 23281 26862 32286
Quarterly (Rs. In Cr) Sep.09 Dec.09 Mar.10 Jun.10 Cash Flow (Rs. In Cr) FY09A FY10A FY11E FY12E
Revenue 5585 5741 5944 6198 Operating `
EBITDA 1926 2038 2022 1962 Net Income 6005 6256 6936 8098
Interest 0 0 0 0 Change in WC -460 -40 -232 -1059
EBDT 1926 2038 2022 1962 Other Adjustment -220 99 877 943
Dep 233 231 220 207 CF from Opeartion 5325 6315 7580 7981
Other Inc. 239 231 198 239 Investment
Extraordinary 0 0 48 0 Capex -1341 -846 -1089 -1359
PBT 1932 2038 2048 1994 Other Investment 1128 -2774 0 0
Tax 397 455 441 506 Total Investment -213 -3620 -1089 -1359
PAT 1535 1583 1607 1488 Financing
EPS (Rs.) 26.83 27.72 28.29 26.05 Diviend Paid -2494 -1574 -3355 -2674
Performance Ratio FY09A FY10A FY11E FY12E Share Capital 64 89 0 0
PAT growth (%) 28.5% 6.5% 8.8% 16.8% Total Financing -2430 -1485 -3355 -2674
EBITDA margin (%) 33.2% 35.0% 33.4% 33.1% Net Chg. in Cash 2682 1210 3136 3948
Adj.PAT margin (%) 27.6% 28.2% 25.1% 24.3% Eff of exch diff on trans 76 -31 0 0
ROE (%) 37.4% 30.9% 27.9% 27.6% Cash at beginning 8235 11043 10556 13692
ROIC (%) 54.1% 52.2% 52.5% 54.3% Cash at end (incl dep with F 10917 12253 13692 17640
Valuation Ratio FY09A FY10A FY11E FY12E Per Share Data FY09A FY10A FY11E FY12E
Price Earnings (x) 29.46 27.88 25.34 21.70 Reported EPS 104.60 111.18 121.39 141.73
Price / Book Value (x) 9.66 7.65 6.60 5.48 Adjusted EPS 104.43 108.87 121.39 141.73
EV / Sales 7.69 7.13 5.74 4.64 BV per share 318.31 401.93 466.10 561.03
EV / EBIDTA 23.17 20.35 17.17 14.03 Cash per share 169.06 248.80 304.62 373.73
Dividend Yield 1.59% 1.16% 1.63% 1.30% Dividend per share 23.50 25.00 50.00 40.00
Source: Nirmal Bang Research, Company data
 Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)

NOTE

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