13 March 2013
Update | Sector: Technology
Infosys
BSE SENSEX
S&P CNX
19,363
5,851
CMP: INR2,862
TP: INR3,260
Buy
Making a case for growth convergence
Deals won, visible fruition of changed strategy increase growth confidence
Bloomberg
Equity Shares (m)
INFO IN
571.4
M.Cap.(INR b)/(USD b) 1,635/30.1
52-Week Range (INR) 3,010/2,102
1,6,12 Rel. Perf. (%)
3/5/-9
Infosys' stock saw a spike in response to its 3QFY13 results and has moved in a range ever
since. We believe that 3QFY13 may only have been the first quarter of a visible momentum
in the company's growth, and that there is further upside in the stock from current levels.
We present a series discussing Infosys' potential to build upon its impressive 3Q
performance, in the first of which, we make a case for revenue growth convergence.
Valuation summary (INR b)
Y/E March
2013E
Sales
406.3
EBITDA
118.2
PAT
92.9
EPS (INR)
162.6
EPS Gr. (%)
11.7
BV/Sh. (INR) 647.9
RoE (%)
26.4
RoCE (%)
30.3
Payout (%)
33.8
Valuations
P/E (x)
17.6
P/BV (x)
4.4
EV/EBITDA (x) 11.9
Div Yield (%) 1.9
2014E
446.8
129.2
99.8
174.7
7.4
752.3
24.9
29.1
34.3
16.4
3.8
10.4
2.1
2015E
502.4
145.1
116.4
203.8
16.7
881.1
26.8
28.3
31.4
14.0
3.2
8.8
2.2
TCV of deals in outsourcing and PPS imply acceleration in FY14
Exit rate of USD1,925m (INFY's 4QFY13 guidance) implies 4.8% organic revenue
growth in FY14. Factoring 3Q outsourcing deals TCV of USD731m (assumed to
accrue over five years and factoring revenues from TCV in PPS work out to organic
growth rate of 7.5% in FY14. Including full year revenues at Lodestone implies
growth of 9.2%.
Obvious upside to base assumptions makes a case for convergence
We see an obvious upside to the above growth number because it assumes:
TCV of outsourcing deals only in 3QFY13, while INFY bagged 4 large outsourcing
deals in 1Q and 6 deals in 2Q
No growth at Lodestone in FY14
Revenue recognition from PPS over five years v/s guidance of 3-5 years
Improvement in pipeline a function of internal changes
Infosys' pipeline in 2HCY12 improved over 1HCY12. This was largely an outcome
of measures taken by the company to ensure growth revival, than any macro
improvement. This is reflected in two metrics in particular:
1. Growth outperformance at Business IT Services (BITS) segment v/s other
segments in five out of the last seven quarters.
2. Decline in constant currency realization in three out of the last four quarters.
Shareholding pattern (%)
As on
Dec-12 Sep-12 Dec-11
Promoter
16.0
16.0
16.0
Dom. Inst 18.7
18.3
17.5
Foreign
51.6
51.9
52.4
Others
13.7
13.7
14.1
Nasscom guidance suggests higher growth for Infosys
Stock performance (1 year)
Nasscom's guidance of 12-14% growth in exports in FY14 is unlikely without
growth acceleration at Infosys and Wipro. Cognizant guided for a deceleration in
CY13 growth and even 17% growth at TCS explains only negligible acceleration at
Nasscom. 23%+ of the rest of the exports comes from Infosys and Wipro. A large
part of the remainder comes from MNC ITs, which may not grow as fast
(considering Accenture's guided deceleration), implying onus of growth
acceleration on the only remaining heavyweights, without which, meeting
Nasscom's forecast becomes mathematically difficult
Multiple factors back potential growth recovery amid cautious guidance
Investors are advised to refer
through disclosures made at the end
of the Research Report.
While the management continues to guide cautiously, following factors bolster
our confidence on sanguine growth, going forward: [1] recovery in under-spent
discretionary budgets, [2] uncertainty and not ability driving cautious stance
(healthy cash reserves with clients), and [3] better pipeline YoY.
1
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com) +91 22 3982 5424