infy research report

10 January 2014

3QFY13 Results Update | Sector: Technology

Infosys

Ashish Chopra ([email protected]); +91 22 3982 5424

Siddharth Vora ([email protected]); +91 22 3982 5585

BSE SENSEX S&P CNX CMP: INR3,549 TP: INR4,156 Buy 20,758 6,171

Bloomberg INFO IN

Equity Shares (m) 574.2

M.Cap. (INR b) / (USD b) 2,037.9/32.9

52-Week Range (INR) 3,581/2,190

1, 6, 12 Rel. Per (%) 7/23/47

Financials & Valuation (INR Billion)

Y/E MAR 2014E 2015E 2016E

Sales 505.4 575.6 642.3

EBITDA 135.9 162.8 184.8

PAT 105.9 130.4 148.4

EPS (INR)* 189.2 228.3 259.7

EPS Gr. (%) 14.8 20.6 13.8

BV/Sh. (INR) 826.5 996.2 1,185.7

RoE (%) 24.3 27.3 25.9

RoCE (%) 28.0 28.6 27.3

P/E (x) 18.7 15.5 13.7

P/BV (x) 4.3 3.6 3.0

* FY14 EPS excludes INR2.19b (INR3.8/sh)

impact from one-time visa issue settlement

fees

3QFY14 performance: INFO’s 3QFY14 revenue at USD2,100m was in line with our estimate, but EBIT margin at 25% expanded 140bp QoQ, above our estimate of 90bp expansion to 24.5%. PAT at INR28.75b grew 11% QoQ, well above our estimate of INR27.6b, driven by forex gains of INR1.2b.

Guidance: For FY14, company guided for USD revenue growth band of 11.5-12% YoY (up from 9-10%), implying -0.4% to +1.4% QoQ growth in 4QFY14.

Expect upgrades to OPM estimates: We see a strong case for earnings upgrade driven by better profitability: [1] current EBIT margin consensus of 25% for FY15 (which was OPM in 3Q), with multiple efforts still on, [2] levers on productivity, offshoring, utilization and ongoing delivery effectiveness.

Executive Chairman’s comments on key issues: Mr Narayana Murthy cited broad timelines to turn around INFO in the three-pronged approach: cost effectiveness (6-18 months), sales effectiveness (9-21 months) and delivery effectiveness (up to three years). Nomination committee’s search for next CEO would be from internal and external candidates. The two-president structure allows the committee to assess internal cadre.

Client’s IT services budgets maybe marginally up: While client budgets are likely to remain flat, Services budgets in IT could be marginally higher. FSI and Retail are looking up, so is manufacturing (excluding Hi-Tech).

Our EPS estimates for FY15E/FY16E are raised by 4.3%/2.1% to INR228.3/INR259.7; following OPM upgrades of 74bp/50bp. Despite multiple senior level exits, we expect the turnaround at INFO to progress steadily. We expect USD revenue CAGR of 13% over FY13-16E and EPS at a CAGR of 16.4%. Maintain Buy with a target price of INR4,150 (16x FY16E EPS).

Investors are advised to refer through disclosures made at the end of the Research Report.

10 January 2014 2

Infosys

Revenue: In line with estimates; offshore shift offset by productivity gains Infosys’ 3QFY14 USD revenues grew 1.7% QoQ to USD2,100m, in line with our

estimate of USD2,101m. Growth in constant currency was 1.2% QoQ, in line. Cross currency movements impacted revenue growth by -50bp in 3QFY14.

Overall volume growth was 1.7% QoQ (v/s est. of 1.3% QoQ); IT services volume growth was 0.6% QoQ as onsite volume declined by 3.4% and offshore volumes increased by 2.6%.

In constant currency, both onsite and offshore realization were up 2.2%, which, along with offshore effort shift of 130bps to 70.1% contributed to blended realization improvement of 0.7%. Revenue mix shifted in favor of offshore by 140bp QoQ to 48.9%.

Rupee revenue was INR130.26b, grew 0.5% QoQ (in line with estimate of INR130.29b). Realized currency rate during the quarter was INR62.03/USD v/s our assumption of INR62/USD.

USD revenue grew 1.7% QoQ and 1.2% QoQ in constant currency terms, in line

Source: MOSL, Company

Profitability: Operating margin above estimate, PAT beat driven by other income / better margins EBIT margin during the quarter was 25%, +140bps QoQ, above our estimate of

90bp QoQ expansion to 24.5%. EBITDA margins improved by 170bps QoQ to 27.8%


Factors which led to improvement in margins are: [1] Gross Margins increased

by 100bps to 38.9% as efforts mix shifted offshore by 130bps [2] Salary cost in S&M reduced by 90bps QoQ to 4% of revenues (4.9% in 2Q was unusually high

29.1 31.1 33.7 32.6 30.6 29.1 28.5 26.5 26.5 26.1 27.8

12.8 13.3

11.9 11.4 11.6 11.8

11.3 11.4 11.4 11.8

11.1

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

EBITDA Margins (%) SG&A (%)

10 January 2014 3

Infosys

on the back of variable component), [3] Utilization including trainees improved by 40bps to 74.1%.

Salary costs in S&M rationalized to previous levels post variable pay in last quarter


PAT was INR28.75b, above our estimate of INR27.6b, on higher other income

(INR7.3b v/s estimate of INR5.6b), driven by forex game of INR1.2b; and above-estimate operating margins.

Guidance: Upgrades full year guidance to 11.5 – 12.0%, implying -0.4% to +1.4% QoQ growth in 4Q For FY14, Infosys guided for USD revenue growth band of 11.5-12% YoY (earlier

9-10%). 4Q implied growth is 1.4% at higher end. We expected INFO to raise its guidance to 11.5% at the higher end. INFO’s guidance implies 12.4% - 12.9% YoY growth in constant currency.

INFO’s earlier guidance of 9-10% YoY in USD implied CQGR -1.6% to -0.8% in 2HFY14.

Segment-wise performance: Broad-based nature of growth was a key positive Among verticals, Life Sciences (10.5% QoQ, 29.3% of incremental revenues),

Retail & CPG (3.6% QoQ, 34% of incremental revenues) and BFS (2% QoQ, 33% of incremental revenues) drove growth. Manufacturing (-0.1% QoQ), Transport & Logistics (-9.6% QoQ), Healthcare (-3.2% QoQ) and Telecom (-3.3% QoQ) lagged. While there is strong traction in BFSI, Retail and CPG; manufacturing is a mixed big and outlook continues to be challenging in Telecom (7.9% of revenues).

3.7 4.0

4.2 4.0 4.2

4.9

4.0

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14

Salary costs in S&M as a % of revenues

10 January 2014 4

Infosys

Life Sciences, Retail & CPG and BFS led growth among verticals

Verticals Contribution to

rev (%) Growth - QoQ

(%) Contr to incr rev

(%) 4-Qtr CQGR

BFS 27.2 2.0 33.3 2.8 Insurance 6.3 1.6 6.3 0.1 Manufacturing 22.8 -0.1 -1.5 3.7 Retail and CPG 16.0 3.6 34.2 2.4 Transport and Logistics 1.6 -9.6 -10.6 -0.6 Life Sciences 5.0 10.5 29.3 3.4 Healthcare 2.0 -3.2 -4.1 10.0 Energy and Utilities 5.2 3.6 11.3 1.4 Telecom 7.9 -3.3 -16.4 -2.5 Others 6.0 5.2 18.2 4.6


Among services, Consulting grew above company average (2% QoQ) amid some

pick up in discretionary spend while contribution to incremental revenues was in line with their contribution to total revenues (33%). Traditional Business IT Services and Products. Platform & Solutions grew by 1.5% QoQ and 1.6% QoQ espectively.

Broad based growth among services

Services Contribution to

rev (%) Growth - QoQ


(%) 4-Qtr CQGR

Business IT Services 61.3 1.5 55.2 2.1

Consulting Package Impl & Others 33.4 2.0 39.5 3.0

Products, Platforms and Solutions 5.3 1.6 5.3 1.4


In terms of geography, Europe grew by 5.5% QoQ contributing 79.6% of the

incremental revenues (3.5% in constant currency). While North America declined by 0.8% QoQ due to furloughs and shutdown during the quarter; its incremental revenues impact (-31%) was compensated by RoW which grew by 5% QoQ contributing 36.8% to the incremental revenues.

Europe led among geographies

Geographies Contribution to

rev (%) Growth – QoQ


(%) 4-Qtr CQGR

North America 60.0 -0.8 -31.1 2.0

Europe 24.9 5.5 79.6 3.3

India 2.6 10.1 14.8 6.8

Rest of the world 12.5 5.0 36.8 1.8

Source: MOSL, Company Potential earnings upgrade from INFO’s improving OPM – Making a case INFO achieved 25% EBIT margin in 3QFY14, and margin expansion during the

quarter was an encouraging early indicator of the fruition of recent efforts around cost optimization. That said, its efforts towards better efficiency are still Work-in-progress, and more progress on the same will help drive even better profitability.

10 January 2014 5

Infosys

With margins expected to withhold 25-26% levels over the medium term, we note that the consensus EBIT margin of 24.8% for FY15 will likely see an upgrade. We see the potential in multiple levers:

1. Delivery effectiveness for Infosys is an ongoing process, which, as pointed out by Mr. Murthy, could take up to 3 years time. The result of the same exercise will also feed into the improvement company’s margins.

2. INFO managed to improve the efforts mix in favor of offshore by 130bp QoQ in 3QFY14, and continues to look at opportunities to drive the metric further.

Offshore effort shift of 130bps led to lower volume and pricing growth


3. Utilization, too, continues to have some room for expansion left, and lack of

hiring to backfill attrition in the current quarter could be an indicator of a conscious effort to drive the same.

Company intends to take its utilization (excluding trainees) to 80-82%


4. INFO managed to improve its revenue productivity in each of the last two

quarters. This, despite company’s thrust on reviving the growth in price sensitive bread-n-butter traditional services, and bidding for the large outsourcing contracts with the necessary aggression in the market.

69.3 69.3 69.8 70.0 70.1 69.9

69.4 68.6

68.0 68.8

70.1

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

Offshore Effort Mix ( IT Services & Consulting)

69.6 70.2 69.9

67.2 67.2

69.6 70.1 70.9 72.4

73.7 74.1 74.9

77.3 77.4

73.0 71.6

73.3 73.2 73.9 75.9

77.8 78.0

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

Utilization Incl. Trainees(%) Utilization Excl. Trainees(%)

10 January 2014 6

Infosys

NRN clarifies on dissolution of Executive Council, 2-President Structure, Senior level exits and Timelines for INFO’s turnaround Executive Council: Decision to have two Presidents took more deliberation.

Recommendation to expand executive council was accepted in a hurry. However, recommendation of having two Presidents would render Executive Council redundant, as the two Presidents would have their own Governing councils set up in a month’s time. Therefore, despite expanding only a couple of months ago, we bit the bullet and dismantled.

Two Presidents: Having two Presidents – one focusing on market and one on delivery effectiveness is a good one. Will give sufficient time for this structure. Gives nomination committee the opportunity to consider internal cadre of leaders along with external candidates. It not only makes the organization more efficient, but also helps nominations committee create a portfolio of candidates for next CEO. If nomination committee decides that the next CEO will be from outside, the current structure is least perturbing to the operations.

Senior level exits: Focus has always been on developing leadership talent. Three-tier leadership program within the company has now created a pool of ~ 600 leaders. As far as future is concerned, it will not be compromised due to lack of leadership. As far as exits are concerned, it is good for the company. This is not my worry.

Transformation timelines: Cost optimization is one of the initiatives likely to yield results earlier than the other two (between 6-18 months). Sales effectiveness will bring value anywhere between 9-21 months. Delivery effectiveness takes up to three years.

Takeaways from Management commentary IT Services budgets are marginally positive: Client budgets are likely to remain

flat overall, with mixed trends across sectors – budgets are trending flat to marginally better in some verticals and declining in others. Overall Services budgets in IT are expected to be marginally higher.

Vertical-wise traction: FSI clients focusing on costs take-out and deal pipeline is healthy. Client budget for CY14 are flat-to-higher. Manufacturing is stable overall, with increase in budgets across segments, with the exception of Hi-tech, where budgets may decline YoY. Telecom is still weak, with only few pockets seeing healthy pipeline. Budgets are likely to be down YoY. RCL – Retail is seeing higher discretionary spending, while patent cliff-driven cost takeout focus in Life Sciences could benefit the IT companies.

EBIT margin could expand further if pricing is stable: Several initiatives are WIP in terms of innovation both in the area of sales effectiveness and delivery effectiveness. Hopefully, the positive impact of these will be seen in 1-3 years. 25-26% OPM is a reasonable assumption in the medium-to-long term. The management will continue to plough the levers on the margins, and it could expand further if the pricing environment remains stable.

US decline an aberration: US geography declined 0.8% QoQ in 3QFY14. However, this is a quarterly phenomenon and US remains a strong growth drive for the company. The revenue trends from US will be definitely better in CY14.

10 January 2014 7

Infosys

Management transitions continue, with zero impact on client relationships: The transition in the top level of the organization has been significant, and transition in the middle level management may follow. However, these have had no impact on IFNO’s relationships with clients, given connect at multiple levels. Secondly, there is some more realignment at the top, yet to be announced, which could follow after some time.

Large deal wins: The company won 3 large deals in Europe and 2 large deals in US. Total TCV of deals won during the quarter was USD500m, taking TCV in large outsourcing deals to USD2.5b in the last 5 quarters. Pipeline remains healthy and Business environment improved marginally in most business segments.

Change in estimates: Upgrading FY15/16 EPS by 4.3%/2.1%, margins by 74bp/50bp INFO guided for FY14 USD revenue growth of 11.5-12%. Considering the

management’s recent conservative stance in sharing outlook, we see the company exit the year with marginally better growth (we have revised our 4QFY14 USD revenue growth to 2% from 1.3% earlier). Our revenue growth estimates for FY15E/FY16E are largely unchanged, and a stronger exit expectation v/s earlier feeds into marginally higher absolute revenues in FY15E/FY16E (0.3%/0.7%).

INFO’s impressive margin expansion was the key positive in 3QFY14, and our expectations of continued sanguine profitability are driven by the company’s outlook of 25-26% EBIT margin in the medium-to-long term. Consequently, our EPS estimates for FY15E/FY16E are revised upwards by 4.3% for FY15E to INR228.3 and 2.1% for FY16E to INR259.7.

Change in estimates

Revised Earlier Change (%)

FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E

INR/USD 60.9 61.0 60.0 60.9 60.0 60.0 0.0 1.7 0.0

USD Revenue (m) 8,299 9,436 10,705 8,287 9,409 10,634 0.1 0.3 0.7

USD revenue gr.(%) 12.2 13.7 13.4 12.0 13.5 13.0 17bp 17bp 42bp

EBIT Margin (%) 24.1 25.9 26.5 24.1 25.2 26.0 7bp 74bp 50bp

EPS (INR)* 189.2 228.3 259.7 184.5 218.8 254.4 2.6 4.3 2.1

EPS Growth (%) 14.8 20.6 13.8 11.9 18.6 16.3


* FY14 EPS excludes INR2.19b (INR3.8/sh) impact from one-time visa issue settlement fees

Valuation and View Despite multiple key senior level exits, INFO’s competent management

combined with the leadership of Mr. Murthy, gradually should come good on its objectives over the medium term. NRN’s following comments during the AGM back in June 2013 are probably more evidenced in the recent top management flux: “The challenge is daunting and the task is tough. Therefore, the task of rebuilding a desirable Infosys will take at least 36 months. In the process, there will be some tough decisions resulting in pain as we move forward”

INFO remains focused on bridging the underperformance on both growth as well as margins, and has been putting right the factors that drove sub-par

10 January 2014 8

Infosys

execution. Growth and deal signings have started to improve, and that bodes well for profitability too, going forward.

In 3 out of the previous 4 quarters, INFO surprised positively on revenue growth and 3QFY14 was the first in few when INFO’s margin uptick was a positive surprise.

We expect Infosys to grow its USD revenues at a CAGR of 13% over FY13-16E and EPS at a CAGR of 16.4% during this period. The stock trades at 15.5x FY15E and 13.7x FY16E EPS. Maintain Buy, with a price target of INR4,150, which discounts FY16E EPS by 16x.

Other Result Highlights Utilization (IT Services and Consulting) including trainees decreased 60bp QoQ

to 72.5% and Utilization excluding trainees was 76.9%, -60bp QoQ Utilization (Total) including trainees increased 40bp QoQ to 74.1% and

Utilization excluding trainees was 78%, +20bp QoQ The company won five large deal wins total TCV signings worth ~USD500m in

the quarter Infosys Edge won 14 deals during the quarter; 8 in platforms and 6 in products. Offshore mix shifted +140bp QoQ to 48.9% Gross Headcount addition stood at 6,682; while there was a net reduction of

1,823. Total employee headcount was 158,404 Attrition(LTM) was 18.1% (v/s 17.3% in 3QFY14). Absolute attrition was lower at

8,505 in the quarter v/s 9,204 in 2QFY14. Proportion of revenues from fixed price (excluding products) was up 80bps QoQ

at 42.9% The company has USD1,049b hedges as at end of 3QFY14 (similar to 2QFY14) Account receivable days increased to 65 in 3QFY14, v/s 62 in 2QFY14 The company closed the quarter with cash and equivalents of USD4.4b

10 January 2014 9

Infosys

Operating Metrics 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 Verticals (%)

Banking and Financial Services 28.1 28.2 27.9 27.4 27.7 27.0 26.9 27.2 27.0 27.1 27.2 Insurance 7.3 7.1 7.4 6.9 6.6 6.7 6.9 6.7 6.7 6.3 6.3

Manufacturing 20.3 20.2 20.4 21.3 22.0 22.1 21.7 22.2 22.5 23.2 22.8

Retail & CPG 16.1 15.6 15.2 15.8 16.9 17.0 16.0 15.4 15.8 15.7 16.0 Transport & Logistics 1.8 1.7 2.0 1.6 1.7 1.7 1.8 1.8 1.8 1.8 1.6 Life Sciences 3.7 3.8 4.1 3.9 3.7 3.9 4.8 4.8 4.7 4.6 16.0 Healthcare 1.1 1.8 1.8 1.6 1.4 1.4 1.5 1.9 2.4 2.1 1.6

Energy & Utilities 5.7 5.7 6.0 6.1 4.6 5.3 5.4 5.2 4.9 5.1 5.2 Communication & Services 10.6 10.4 9.8 10.1 10.1 9.9 9.6 9.3 8.5 8.3 7.9 Others 5.3 5.5 5.4 5.3 5.3 5.0 5.5 5.5 5.7 5.8 5.2

Service Lines (%)

Development 16.1 17.1 17.1 16.9 17.1 17.0 15.8 15.5 15.7 16.0 15.9 Maintainence 22.3 21.6 21.8 20.9 20.9 21.4 20.0 19.9 19.3 19.1 19.2 Infrastructure Management 5.9 5.8 6.1 6.2 6.6 6.8 6.9 7.2 7.0 7.2 6.9 Testing 7.5 8.2 7.9 7.8 8.3 8.6 8.4 8.3 8.4 8.4 8.7 Business process management 5.4 5.4 5.2 4.8 4.9 4.7 5.2 5.2 5.1 5.1 5.3 Engg Services 3.2 3.4 3.6 3.4 3.5 3.4 3.2 3.2 3.2 3.3 3.2 Others 2.8 2.8 2.6 2.7 2.7 2.6 2.4 2.3 2.3 2.3 5.3 BITS 63.2 64.3 64.3 62.7 64.0 64.5 61.9 61.6 61.0 61.4 64.5

CSI 31.5 30.7 30.6 31.1 29.9 30.0 32.6 32.7 33.6 33.3 33.4

Products 4.8 4.2 4.8 4.4 4.5 3.8 3.9 4.0 3.7 3.7 3.8

BPM Platforms 0.7 0.7 0.8 1.4 1.3 1.3 1.3 1.3 1.2 1.2 1.1

Others 0.3 0.3 0.3 0.4 0.3 0.4 0.3 0.4 0.5 0.4 0.4

PPS 5.8 5.2 5.9 6.2 6.1 5.5 5.5 5.7 5.4 5.3 5.3

Geography (%)

North America 64.2 65.3 63.7 62.4 64.1 63.9 61.0 60.2 61.4 61.5 60.0 Europe 21.3 20.5 22.6 23.1 21.4 21.9 24.0 25.0 23.6 24.0 24.9 India 2.6 2.2 2.1 2.0 2.0 1.6 2.2 2.4 2.6 2.4 2.6 RoW 11.9 12.0 11.6 12.5 12.5 12.6 12.8 12.4 12.4 12.1 12.5

Clients (%)

Revenues from top client 4.5 4.6 4.1 4.1 4.1 4.0 3.6 3.6 3.9 3.9 3.7 Revenues from 2-5 client 11.4 11.3 10.9 11.3 12.1 12.0 11.0 11.1 11.0 11.1 10.4 Revenues from 6-10 clients 9.3 9.3 9.5 9.0 9.1 9.4 9.3 9.3 9.1 9.5 9.4 Revenues from Non-Top 10 clients 74.8 74.8 75.5 75.6 74.7 74.6 76.1 76.0 76.0 75.5 76.5

Clients added during the quarter 26 45 49 52 51 39 89 56 66 68 54 Total active client 628 647 665 694 711 715 776 798 836 873 888


10 January 2014 10

Infosys

Operating Metrics 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 QoQ Growth (%)

Verticals

Banking and Financial Services 3.4 4.2 3.4 -4.7 -1.0 0.7 6.3 2.0 2.1 2.8 2.0 Energy & Utilities 2.5 4.5 8.9 -0.3 -25.3 18.1 8.3 -2.3 -3.2 8.0 3.6 Insurance 5.8 1.6 7.8 -8.6 -5.3 4.0 9.5 -1.5 2.7 -2.4 1.6 Manufacturing 3.8 4.0 4.5 2.4 2.3 2.9 4.4 3.8 4.1 7.0 -0.1 Others 9.7 14.8 5.3 -6.3 -4.6 1.5 21.8 4.9 7.8 1.3 5.7 Retailing 15.8 1.2 0.8 1.9 5.9 3.1 0.1 -2.4 5.4 3.1 3.6 Telecom -7.1 2.5 -2.5 1.1 -1.0 0.4 3.1 -1.7 -6.1 1.3 -3.3 Transportation -10.6 -1.3 21.7 -21.6 5.2 2.5 12.6 1.4 2.7 3.8 -9.6

Service Lines

Development 4.3 11.0 3.4 -3.1 0.2 1.9 -1.2 -0.5 4.0 5.7 1.0 Maintainence 5.7 1.2 4.4 -6.0 -1.0 4.9 -0.6 0.9 -0.4 2.7 2.2 Infrastructure Management 0.9 2.7 8.8 -0.3 5.4 5.6 7.9 5.9 -0.1 6.7 -2.6 Consulting & Package Implementation 3.5 2.4 28.1 -0.3 -4.8 2.8 15.5 1.8 5.5 2.8 2.0 Testing 7.2 14.2 -0.3 -3.2 5.4 6.2 3.9 0.2 3.9 3.8 5.3 Engg Services 39.1 11.0 9.5 -7.4 1.9 -0.4 0.1 1.4 2.7 7.0 -1.4 Business process management 0.6 4.5 -0.4 -9.5 1.1 -1.7 17.6 1.4 0.7 3.8 5.6 Others -4.4 14.0 -16.7 4.8 -4.2 -11.2 -1.9 1.4 -1.6 3.8 -7.2 Products -7.3 -8.6 18.2 18.5 -1.0 -2.8 6.3 5.1 -2.7 1.8 1.6

Geography

North America 5.1 6.3 0.9 -3.9 1.7 2.2 1.5 0.1 4.8 3.9 -0.8 Europe 0.5 0.6 14.0 0.2 -8.3 4.9 16.5 5.7 -3.0 5.5 5.5 India 0.4 -11.6 -1.3 -6.6 -1.0 -18.0 46.2 10.7 11.3 -4.2 10.1 RoW 7.9 5.4 0.0 5.7 -1.0 3.3 8.0 -1.7 2.7 1.3 5.0

Clients

Revenues from top client -0.1 6.8 -7.8 -1.9 -1.1 0.1 -4.3 1.4 11.3 3.8 -3.6 Revenues from top 5 clients 7.7 4.5 -2.4 0.7 4.1 1.3 -3.0 2.1 4.1 4.5 -4.5 Revenues from top 10 clients 5.6 4.5 0.6 -2.3 2.6 3.0 0.1 1.8 2.7 5.9 -2.5 Revenues from Non-Top 10 clients 3.9 4.5 4.4 -1.8 -2.3 2.4 8.5 1.3 2.7 3.1 3.0 Revenues from 2-5 client 11.1 3.6 -0.2 1.7 5.9 1.7 -2.5 2.3 1.8 4.7 -4.8 Revenues from 6-10 clients 2.1 4.5 5.7 -7.1 0.0 5.9 5.2 1.4 0.5 8.3 0.6


10 January 2014 11

Infosys

Infosys: an investment profile Company background Infosys is the second-largest IT services company in India with revenue of ~USD8.1b (LTM) and employing over 158,000 people. It defines designs and delivers IT-enabled business solutions that help many Global 2000 companies win in a flat world. INFY has a global footprint in over 30 countries and development centers in India, China, Australia, the UK, Canada and Japan. Company's service offerings span business and technology consulting, ADM, SI, product engineering, IT infrastructure services and BPO. Key investment arguments Change in strategy to allow increased flexibility is

reflecting in better deals signing. Ample margin levers to drive healthy financial

performance going forward Key investment risks Continued pricing decline akin to FY13 could lead

to prolonged pain on the bottom line, despite offset coming from improvement in volume growth.

Appreciation in INR could hamper profitability. Macro headwinds impact the company more due

to higher discretionary mix in its portfolio.

Recent developments INFO won 5 large deals totaling to a TCV of

USD500+m in 3QFY14. Infosys Edge won 14 deals during the quarter; 8 in

platforms and 6 in products. Valuation and view USD Revenue and EPS CAGR of 13% and 16.4%

respectively over FY13-16E. Valuations at 15.5x FY15E and 13.7x FY16E EPS. Maintain Buy with a target price of INR4,150,

based on 16x FY16E earnings. Sector view With strengthening demand in the US and large

deals traction in traditional services in Europe, early indicators are that growth in FY15 should be better than FY14.

We see better risk-reward in Tier-I and do not expect any further bridging of the valuation gap on the following counts: [1] tier-II growth continues to at best, match tier-I, despite a significantly lower revenue base, [2] Current tier-II discount to top-tier IT is much lower to historical P/E discount, and [3] Cash conversion capability at tier-II has been significantly inferior.

Comparative valuations Infosys TCS Wipro P/E (x) FY14E 18.7 23.6 17.7

FY15E 15.5 20.7 15.8

P/BV (x) FY14E 4.3 8.6 4.2

FY15E 3.6 6.8 3.5

EV/Sales (x) FY14E 3.4 5.3 2.9

FY15E 2.8 4.5 2.5

EV/EBITDA (x) FY14E 12.7 17 12.9

FY15E 10.1 15.1 11.2

EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%)

FY14 189.2 182.4 3.8%

FY15 228.3 215.2 6.1%

Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%)

3,549 4,156 17.1 Buy

hShareholding pattern (%)

Sep-13 Jun-13 Sep-12

Promoter 18.8 16.0 16.0

Domestic Inst 19.0 18.3 18.3

Foreign 63.6 53.3 51.9

Others 13.7 12.4 13.7

Stock performance (1 year)

10 January 2014 12

Infosys

Financials and valuation

10 January 2014 13

Infosys

N O T E S

10 January 2014 14

Infosys

Disclosures This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement INFOSYS LTD 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No

Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions. For U.K. This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons. For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account. For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Anosh Koppikar Kadambari Balachandran Email : [email protected] Email : [email protected] Contact: (+65) 68189232 Contact: (+65) 68189233 / 65249115 Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 04931

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: [email protected]

infy research report

Documents