STOCK TIPS 4 U - Buy Infosys Tech; target of Rs 3400: Motilal Oswal

Motilal Oswal is bullish on Infosys Technologies and has recommended buy rating on the stock with a target of Rs 3400 in its April 15, 2011 research report.

“Infosys Technologies, 4QFY11 revenue well below expectations (US$1,602m v/s est. of US$1,653m), driven by volume decline of 1.4% v/s est. of 4% increase. Volume decline primarily driven by continued weakness in Telecom (revenue down 4.8% QoQ in CC) and surprising weakness in the Insurance sub-segment within BFSI. Decline in North America revenues was also a surprise (0.5% QoQ) in the context of recent management commentary. Volume decline of 1.4% represented a rare but material miss relative to Infosys' guidance which had called for volume growth of 1-2% in 4QFY11. A 5% point sequential decline in utilization (including trainees) primarily drove 120bp sequential decline in EBIT margin (an aggregate drag of 260bp). This was despite a 2.1% sequential increase in realization (should have helped margin by only ~100bp as part of the increase was driven by business mix) and tailwinds from Rupee depreciation v/s the US dollar (margin benefit of ~40bp).”

“Though US$ revenue guidance for FY12 of between 18-20% and INR revenue guide of 15.4-17.3% is in-line with our expectations, EPS estimates fall well short. INR EPS guidance implies a growth of just 5.7-7.37% as operating margins are expected to decline 300bp YoY. Full year FY12 implied net margin of 22.7% at the midpoint represents a decline of ~230bp even from 4QFY11 level of ~25% and FY11 net margin of 24.8%. Also, though US$ revenue guidance of 18-20% is in-line with expectations, volume growth guidance at the mid-point is just 16%.”

“Full year margin decline to be driven primarily by currency (~100bp) and utilization staying near current low levels (impact of ~125bp). Wage inflation impact (10-12% offshore, 2-3% onsite) is expected to be 100bp (300bp inflation impact offset by 200bp improvement on employee pyramid management). S&M expenses may also go up as a % of revenues on significant local and front-end hiring. The magnitude of offset from 3% blended realization improvement should be moderate as most of the improvement is on account of cross currency and business mix. US$ revenue growth guidance for 1QFY12 of just 3% (traditionally strong quarter) at mid point v/s our estimate of 4.2%. Implied CQGR for next three quarters would be 5.5%+, implying a sharply backended revenue growth profile to meet guidance. Rupee revenue growth guidance is just 1.3% at the midpoint for 1QFY12 whereas EPS is expected to decline 12.6% QoQ (v/s our prior est. for growth of 2.3% for revenue and EPS decline of 5.3%). Margins and EPS will get impacted in the quarter because of wage hikes and assumption of Re/US$ of Rs44.5 v/s Rs45.26 in 4QFY11.”

“The absence of one-offs or timing delays in 4QFY11 and the already sharply backended nature of guidance means that it is hard for the consensus to justify any upside to its current US$ revenue growth estimate of 25%. Though one can presumably believe that the margin guidance is conservative, the base case to assume will still be a decent decline, if not a decline as high as 300bp. Consensus prior to today's results was projecting flat to a slight decline in margins for FY12, which implies an inevitable downgrade to earnings. We are revising our top line estimate slightly higher to 24% driven primarily on account of expectation of higher blended realization increase of 2.6% v/s our prior estimate of 1.5%. We are assuming a lower margin decline of 150bp v/s management guidance of a decline of 300bp, though that still represents a downside relative to our prior assumption of flat margins (ex-currency). It may however be noted that the 150bp decline is on a lower base for FY11 driven by the 4QFY11 miss on margins.”

“This results in an EPS downgrade of 7.6% from Rs152 to Rs 140.6 (implying YoY growth of 17.7%). Assuming similar margin profile for FY13, we have downgraded our FY13 EPS estimate by 7.3% to Rs 169.5 v/s prior estimate of Rs 183. Keeping FY13 target P/E at 20x, our revised price target is Rs 3400, implying an upside of 14% from the CMP of Rs 2989. Maintain Buy,” says Motilal Oswal research report.
SOURCE: MONEYCONTROL.COM