Thursday, August 9, 2012



Performance remains subdued: Infosys continues to disappoint the Street with its lacklustre quarterly numbers. For Q1FY2013 the disappointments were written all over with a lower than expected performance in revenues, margins and profitability as well as full year guidance. The company’s revenues in dollar terms were down by 1.1% QoQ to $1,752 million. However, adjusted for a $15-million write-off in the revenues pertaining to project cancellation from an European client and a $13-million impact on account of cross-currency movement, the revenues were $1,780 million. The blended volume growth was up by 2.7% QoQ whereas the pricing declined sequentially by 3.3% onsite and by 3.8% offshore.

Pricing decline, higher employee expenses restrict margins: Despite a 9.7% depreciation in the rupee vis-√†-vis the dollar during the quarter, Infosys has reported a 190-basis point fall in the EBIT margin to 28% on the back of higher employee expenses and pricing decline (of 3.8% QoQ). The net profit for the quarter was down by 1.2% QoQ to Rs2,289 crore (lower than our expectation of Rs2,421 crore).

Valuation and view: A difficult macro environment coupled with the convergence of client-specific issues is causing concerns for Infosys. We have revised our EPS estimates for Infosys by 3.1% and 1.7% on account of currency reset to Rs54.5 and Rs54 for FY2013 and FY2014 respectively. Though the stock has already corrected by 8% post announcement of the results, but we do not see any major upside trigger for the stock in the near to medium term. We maintain our Hold rating on the stock with a price target of Rs2,440. We maintain our preference for Tata Consultancy Services over Infosys