infosys nirmalbang 161010

8/8/2019 Infosys NirmalBang 161010

1/8

Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)Recommendation HOLD Results broadly in line with expectations

Infosys Q2 FY11 revenues grew 12.1% QoQ to Rs.6947 Crsbeating its guidance of Rs.6626 on the back of improvingdemand. Revenue was above our estimates because of higher volumes & an increase in pricing during the quarter.

EBITDA margin improved to 33.3%. (+167 bps QoQ) Theincrease in topline was reflected in the improved EBITDAmargins.

PAT increased by 16.7% QoQ to Rs. 1737 in Q2 FY11 because of improvement in the EBITDA margin and foreign exchangegains. PAT exceeded our estimate reflecting higher-than-expected revenues .

Particulars (Rs. Crs) NBS estimate Actual Variation

Revenues 6,652 6,947 4.4%

PAT 1,655 1,737 4.9%

Volumes witnessed a growth of 7.2% QoQ while pricingincreased by approximately 3.2% in dollar terms.

Gross addition of employees stood at 14,264 in Q2 FY11 ascompared to 8,859 in Q1 FY11. Company plans to hire40,000 employees in FY 2011 to manage the increasedattrition rate and build capacity for higher growth.

Revenue share of fixed price contracts increased by 90 bpsQoQ and the utilization rate improved by 130 bps QoQ

Valuation and RecommendationAt 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 ourtarget PE multiple of 22.0x we arrive at a target price of Rs.3125per share for Infosys. Therefore, the company looks fairly valuedat current levels and doesnt offer much upside from currentlevels in near term. Considering the improved scenario for the ITsector, we recommend to HOLD the stock.

CMP (15/10/2010) Rs. 3076

Sector IT & Software

BSE Code

Stock Details

NSE Code

Bloomberg Code

Market Cap (Rs. cr)

Free Float (%)

52- wk HI/Lo

Avg. volume BSE (Quarterly)

Face Value

Dividend (FY 2010)Shares o/s (No.)

500209

INFOSYSTCH

INFO IN

1,76,581

85%

3249.0/2127.1

96107

Rs.5.00

300%57.14 Crs

Relative Performance 1Mth 3Mth 1 Yr

Infosys 0.85% 11.50% 38.84%

Sensex 3.19% 12.37% 17.04%

0

10000

20000

30000

0

1000

2000

3000

4000

Oct-09 Feb-10 Jun-10 Oct-10Infosys SENSEX

Shareholding Pattern as of 30/09/2010

Promoters Holding 16.04%

Institutional (Incl. FII) 43.73%

Corporate Bodies 6.38%

Public & others 33.85%

Ashish Khetan, Research Analyst (+91 22 3027 8201)[email protected]

Niraj Garhyan, Research Associate (+91 22 3027 8215)[email protected]

YearNet Sales Rs

CrsGrowth

%EBITDA Rs

CrsMargin

%PAT

Rs CrsEPS PE P/BV ROE %

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%
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


2/8

Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)Quarterly Performance

Infosys Q2 FY11 revenues grew 12.1% QoQ to Rs.6947 Crsabove the management guidance. The growth in top-line in Q2FY11 was driven by strong volume growth (7.2% QoQ), a 3.2%increase in pricing, higher utilization rates and a greater shareof onsite business.

EBITDA grew 18% QoQ to Rs. 2315 Crs in Q2 FY11 reflecting thegrowth in top-line. EBITDA margin improved 167 bps QoQ in Q2FY11 on the back of increased in top-line, improved pricing andhigher utilization rate.

Net margin increased by 100 bps to 25.0% reflecting theimprovement in the EBITDA margin and higher other incomedue to foreign exchange gains.

Infosys reported a diluted EPS of Rs. 30.40 in Q2 FY11 whichwas significantly higher than its guidance.

Infosys declared an interim dividend of Rs.10/share and a 30 th 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


3/8

Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)As per IFRS GAAP

In US dollar terms revenues increased 10.2% QoQ, much higher thanthe growth witnessed in Q1 FY11. Net margin improved by 99 bps inQ2 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 primarilydue to improving demand scenario for offshore IT spending. Thecompany is seeing an improving traction from its US clients as well asan uptick in demand in Europe. In rupee terms, management hasguided for an annual revenue growth of 18.5-19.4% for FY 2011

compared to earlier guidance of 16.3-18.2%. The company isconservative on its revenue guidance in rupee terms because of thecurrency volatility witnessed over the past couple of months. Therevised 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 FY2011 by around 260 bps primarily due to cross currency movementsand increased tax liability. Also, it intends to hire around 40000employees in FY 2011 and promote around 12,000 employees acrosslevels in Q3 FY11. This will have further negative impact on margins.

Yrly Guidance

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 2.54-2.58Source: Company data

Rs.in Cr US $ milli on

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


4/8

Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)Management expects an increase of 3.9% QoQ in the revenues for Q3FY11 in dollar terms and a marginal decline of -0.4% QoQ in rupeeterms in Q3 FY11. The management expects the rupee to remainstrong in near term, which will put pressures on revenues & marginsin rupee terms. Profitability is expected to decline due to increase inemployee costs, cross currency volatility and increase in tax liability.

Q2 FY11 Q3 FY11 Var % Q2 FY11 Q3 FY11 Var %

Actual Guidance Actual GuidanceRevenue 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%

QuarterlyGuidance

Rs in Crs US$ mn

Source: Company data

Aggressive hiring plans

Infosys had a record addition of 14264 employees in Q2 FY11 ascompared to 8859 in Q1 FY11. Net addition of employees was 7646 inQ2 FY11. Going forward, Management expects to add 11000employees in Q3 FY11 and has increased the hiring target for FY 2011to 40,000 from the earlier plans of addition of 36000 employees.These aggressive hiring plans indicate that company is gearing up forthe anticipated uptick in demand from developed economies. Thesalary hikes, bonuses and promotions doled out by the company has

enabled it to reduce the attrition rate in Q2 FY11 on a sequentialbasis. On an absolute basis, attrition was down by 1215 resources inQ2 FY11.

QoQ increase in Client Addition

4740

4940

3037

2735 32

4738

27

0

102030405060

Q 3 F Y 0 8

Q 4 F Y 0 8

Q 1 F Y 0 9

Q 2 F Y 0 9

Q 3 F Y 0 9

Q 4 F Y 0 9

Q 1 F Y 1 0

Q 2 F Y 1 0

Q 3 F Y 1 0

Q 4 F Y 1 0

Q 1 F Y 1 1

Q 2 F Y 1 1

The Client addition in Q2 FY11 stood at 27 as compared to 38 in Q1FY11. During 1H FY2011, Infosys has signed 9 transformational deals.


5/8

Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)Volumes and Pricing in Q2 FY11

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%10.0%

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Vol ume growth Inc / Dec in Pri ci ng

Volumes witnessed a growth of 7.2% QoQ which wasmarginally lower than the growth of 7.6% achieved in Q1FY11. Pricing increased by around 3.2% in dollar terms and2.5% in constant currency terms. Going ahead the companysees stronger volume growth with greater traction infinancial services and retail and expects prices to remainstable as not much renegotiations underway. This isexpected to boost the top-line going forward.

Revision in Estimates

We have revised our sales estimates upwards for FY 2011 and FY 2012to reflect better-than-expected improvement in demand scenario andhigher pricing achieved by the company which is expected to remainfirm.

PAT estimate are revised marginally upwards for FY 2011 to reflect theupward revision of revenues partially offset by upward revision insalary and wages.

Particulars

PreviousEstimates

RevisedEstimates Variation

PreviousEstimates

RevisedEstimates 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%

FY 2012FY 2011


6/8

Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)Valuation & Recommendation

The Q2 FY11 results reflect the improvement in the recovery of demand fromthe US and the Europe. The company is seeing an improved traction in Retail,BFSI and Energy & Utility verticals among its US clients. Also, Europe iswitnessing an uptick in demand with an incremental spending inManufacturing, BFSI and Retail segments. In Europe, manufacturing has showna healthy growth particularly in Switzerland, Germany and France ascompanies attempt to achieve cost efficiency through better systems. Duringthe quarter, growth was led by Retail segment where in Infosys caters to 8 outof 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$100mn. Attrition has declined on a sequential basis, but it still remains a concernand Infosys plans to hire around 40,000 employees during FY 2011 to build up

capacity in expectation of an increased demand in future. Overall, theManagement remains optimistic in short term and have a cautious view overthe long term as budgets for FY 2012 are yet to be finalized. The exchange rateremains a major concern as the recent appreciation of rupee will impact thecompanys profitability in near term.

At the current price of Rs.3076, Infosys is trading at a PE of 25.34x on FY 2011EPS & 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 targetprice of Rs.3125 per share for Infosys. Therefore, the company looks fairlyvalued at current levels and doesnt offer much upside from current levels innear term. Considering the improved scenario for the IT sector, werecommend to HOLD the stock.


7/8


8/8

Q2 FY11 Result Update Infosys Technologies Ltd (Infosys)

NOTE

DisclaimerThis Document has been prepared by Nirmal Bang Research (Nirmal Bang Securities PVT LTD).The information, analysis and estimatescontained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. Thisdocument is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and ismeant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for thecontents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or

omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal BangResearch, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in thisdocument.

infosys nirmalbang 161010

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