RESULT UPDATE

INFOSYS
Disappointment continues
India Equity Research| IT

Infosys reported disappointing Q4FY12 numbers as revenue declined 1.9% in USD terms versus our expectation of 1.0% QoQ growth and a muted revenue growth guidance of 8-10% for FY13 (our expectation 911%). Delay in contract closures and ramp ups coupled with ramp down in a few FSI vertical projects during the quarter led to the decline. We expect this to continue for at least one more quarter, which is also evident from the companys muted revenue guidance for Q1FY13 (0-1% growth). Lack of visibility makes us cautious on the stock. At 15.0x FY13E earnings we maintain HOLD.

EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market HOLD Performer Low Equalweight

MARKET DATA (R: INFY.BO, B: INFO IN) CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : INR 2,403 : INR 2,650 : 3,317 / 2,162 : 574.2 : 1,380 / 26,892

Decision making delays, ramp downs mar Q4FY12 performance

Infosys reported revenue of USD1,771mn, (decline of 1.9% QoQ), which was well below lower-end of its guidance (USD1,806mn) and Street estimate (USD1,825mn). Management in the previous quarter had stated that delays in decision making would impact Q4FY12 growth, but this was further aggravated as delays were coupled with deferment in ramp ups and ramp downs in a few projects in the BFS vertical. While volume declined 1.5% QoQ, pricing dipped 1.3% QoQ in cc. EBITDA margin decline of 110bps (in line with expectation) was due to lower utilization driven by lower volume.

Avg. Daily Vol.BSE/NSE(000) : 1,448.5 SHARE HOLDING PATTERN (%)

Others 29.1%

Promoters* 16.0% MFs, FIs & Banks 17.5%

Guidance belies expectation

FY13 revenue growth guidance of 8-10% was below our expectation (9-11%) and that of Street, which was expecting a guidance at the higher end of NASSCOM estimate (1114%). We believe this muted guidance reflects lack of visibility due to delays in decision making and deferment of projects. We believe high reliance on discretionary spending (30% of revenue) and uncertainty in FSI vertical due to extension of timelines in legal work will impact growth in H1FY13 also (muted guidance for Q1FY13 of 0-1%).
FIIs 37.4%

* Promoters pledged shares (% of share in issue)

NIL

PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months 0.7 48.9 (9.5) Nifty (0.7) 12.1 (9.9) EW Technology Index (0.1) 6.0 1.4

Outlook and valuations: Uncertainty ahead; maintain HOLD

We believe Street expectations of a higher growth guidance were unrealistic given the delays in decision making and expect the uncertain environment to continue to impact growth. We are cutting our EPS guidance for FY13 and FY14 by 4.8% and 5.7% to INR160.7 and INR175.0, respectively, to factor in the muted demand outlook and revise our target price to INR2,650. At 15.0x FY13E earnings, we maintain HOLD/Sector Performer.
Financials Year to March Revenue EBITDA Net profit Diluted EPS (INR) Diluted P/E (x) EV/EBITDA (x) EV/Revenues (x) Q4FY12 Q3FY12 Growth % Q4FY11 Growth % 88,520 28,870 23,160 40.5 92,980 31,330 23,720 41.5 (4.8) (7.9) (2.4) (2.4) 72,500 23,210 18,180 31.8 FY12 FY13E (INR mn) FY14E 22.1 337,340 386,174 423,766 24.4 107,080 120,112 126,376 27.4 83,160 91,823 99,989 27.4 145.5 160.7 175.0 16.5 10.9 3.4 15.0 9.2 2.9 13.7 8.4 2.5

Sandip Agarwal
+91 22 6623 3474 sandip,agarwal@edelcap.com

Kunal Sangoi
+91 22 6623 3370 kunal.sangoi@edelcap.com

Omkar Hadkar
+91 22 6620 3147 omkar.hadkar@edelcap.com

April 13, 2012

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

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IT
Key highlights

Reported revenue of USD1,771mn (down 1.9% QoQ) was below our estimate (USD1,824mn) as volume declined 1.5% QoQ in IT services. Gross margin (44.0%) dipped 160bps sequentially due to lower realized exchange rate and lower utilization during the quarter. EBITDA margin (at 32.6%) declined 110bps (in line with expectation) sequentially, largely due to percolation of gross margin and partially offset by lower G&A spend. Net profit at INR23.1bn was down 2.4% QoQ due of lower operating profit. Net margin for the quarter stood at 26.2% (up 70bps QoQ) as higher other income partially offset the lower operating profit. Q1FY13 and FY13 guidance disappoints: Infosys has given a tepid Q1FY13 revenue growth of USD1,771mn-1,789mn, implying a revenue growth of 0.0-1.0% over Q4FY12. While for FY13 it has given guidance of USD7.5bn-7.7bn, implying revenue growth of 8.0-10.0% over FY12. For FY13, the company has guided for an EPS of INR158.76-161.41 at an exchange rate of INR50.88/USD and margin to decline in the 50-100bps range. In USD terms it has guided for a EPS growth of 4.0%-5.7% for FY13. Also, the company expects OPM margin to fall ~200bps in Q1FY13 due to H1B visa payouts (is done in first week of April) and higher onsite addition in Q1FY13.

Table 1: Full year FY13 revenue guidance Guidance (USD mn) Lower band Upper band

FY13 7,553 7,692

FY12 6,994 6,994

Y-o-Y growth (%) 8.0 10.0

Source: Company, Edelweiss research

Table 2: Tepid Q1FY13 guidance Guidance (USD mn) Lower band Upper band

Q113 1,771 1,789

Q412 1,771 1,771

Q-o-Q growth (%) 0.0 1.0

Source: Company, Edelweiss research

Client addition: New client addition continues to be impressive with 52 clients added during the quarter (49 in Q3FY12). Total active clientele now stands at 694 (against 655 in the previous quarter). The number of USD30mn clients increased by 3 to 64; there was an increase in USD40mn (2), USD50 mn (1), USD60mn (1) client brackets over the previous quarter. During the quarter, the company won five deals, of which three are over USD100mn TCV. Dismal performance across top client categories: Infosys top client and top 10 declined sequentially 1.9% and 2.3%, respectively, while top 5 clients grew meagerly by 0.7% QoQ (in USD). Pricing takes a hit: In constant currency, onsite pricing declined 0.4% QoQ while offshore pricing declined 1.8% QoQ; on blended basis, pricing was down 1.3% QoQ. Utilisation takes a dip: Including trainees, utilisation was down by 270bps QoQ to 67.2%; utilisation (ex-trainees) declined 140bps to 73.0%. It also expects utilization levels to rise once volume growth kicks in. Attrition for the quarter stood at 14.7%

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Infosys

Vertical-wise performance: All verticals, barring manufacturing, reported sequential decline with the largest vertical FSI declining 4.7% on sequential basis, followed by retail & life sciences (RCL; down 2.8%). Energy, utilities and communication (ECS) was down 0.7% QoQ while manufacturing vertical was up 2.4% QoQ. The FSI vertical was particularly hit by a few projects which saw ramp downs over the quarter as some projects were deferred while others were cancelled.Management highlighted extension of timelines in regulatory and legal work as a key change in the FSI vertical which can lead to further decline in the verticals overall growth. Currently, we are assuming that only regulatory & legal work related timelines have been postponed and not cancelled. In the energy vertical, the company cited lack of budgets in North America as the key reason for muted growth while Germany and France were looking strong. In the retail space, the company expects technology spends to pick up as same store sales have posted positive growth over the past two months. In the life sciences space, expiry of most patents has resulted in incremental cost cutting pressures which will lead to incremental growth in the coming quarters.

Chart 1: Vertical-wise QoQ revenue growth on reported basis 5.0

3.0 1.0
(%)

(1.0) (3.0) (5.0) Total revenues Manufacturing Q4FY12 RCL FSI Q3FY12
Source: Company, Edelweiss research

ECS

Horizontals: All horizontals, except BPO, reported sequential decline. ADM reported a decline of 4.7% over the previous quarter. Testing and infra management reported sequential decline of 3.2% and 0.3%, respectively. Geo-split: ROW and Europe reported growth during the quarter as revenue grew 5.7% and 0.2% QoQ, respectively. North America declined 3.9% while India revenue declined 6.6%.

Edelweiss Securities Limited

IT
Chart 2: Geography-wise Q-o-Q revenue growth in reported currency 7.0
4.2 1.4
(%)

14.0

(1.4) (4.2) (7.0) ROW Q4FY12 Europe North America Q3FY12

Source: Company, Edelweiss research

India

Net addition: Net addition of 4,906 employees during the quarter, taking the total employee count to 149,994. It expects to add 35,000 in FY13E, of which 13,000 will be in the BPO space and 1,200 local onsite hires. Hedge position: Total outstanding hedge stands at USD889mn in the current quarter. Total cash and equivalents in hand currently at USD4.1bn. Tax and Capex: The company expects 28% tax in FY13E and a capital expenditure of INR20bn.

Edelweiss Securities Limited

Infosys
Financial snapshot Year to March Net revenues Software development expenses Gross profit Selling & marketing exp General & admin exp Overhead expenditure EBITDA Depreciation EBIT Other income Profit before tax Tax Core profit Extraordinary items Reported net profit Diluted EPS (INR)
As % of net revenues Gross profit Selling & marketing exp Admin exp (% of revenue) EBITDA Adjusted net profit Reported net profit Tax rate

Q4FY12 88,520 49,590 38,930 4,520 5,540 10,060 28,870 2,400 26,470 6,520 32,990 9,830 23,160 23,160 40.5

Q3FY12 92,980 50,540 42,440 4,510 6,600 11,110 31,330 2,340 28,990 4,220 33,210 9,490 23,720 23,720 41.5

% Change (4.8) (1.9) (8.3) 0.2 (16.1) (9.5) (7.9) 2.6 (8.7) 54.5 (0.7) 3.6 (2.4) (2.4) (2.4)

Q4FY11 72,500 40,150 32,350 4,000 5,140 9,140 23,210 2,190 21,020 4,150 25,170 6,990 18,180 18,180 31.8

% Change 22.1 23.5 20.3 13.0 7.8 10.1 24.4 9.6 25.9 57.1 31.1 40.6 27.4 27.4 27.4

FY12 337,340 188,790 148,550 17,570 23,900 41,470 107,080 9,290 97,790 19,040 116,830 33,670 83,160 83,160 145.5

FY13E 386,174 218,949 167,225 20,081 27,032 47,113 120,112 11,585 108,526 19,006 127,532 35,709 91,823 91,823 160.7

(INR mn) FY14E 423,766 246,726 177,039 23,542 27,121 50,663 126,376 12,713 113,663 22,934 136,597 36,608 99,989
99,989 175.0

44.0 5.1 6.3 32.6 26.2 26.2 29.8

45.6 4.9 7.1 33.7 25.5 25.5 28.6

44.6 5.5 7.1 32.0 25.1 25.1 27.8

44.0 5.2 7.1 31.7 24.7 24.7 28.8

43.3 5.2 7.0 31.1 23.8 23.8 28.0

41.8 5.6 6.4 29.8 23.6 23.6 26.8

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IT
Company Description
Infosys is the second-largest IT services company in India providing consulting and IT services to clients globally. It is also among the fastest growing IT services organization in the world and a leader in the offshore services space with a pioneer in Global delivery model. Infosys provides business consulting, application development and maintenance and engineering services to 665 active clients spread across Banking, Financial Services, Insurance, Retail, Manufacturing, and Utilities verticals and 50 countries. The company has also its own proprietary core banking software - Finacle used by some of the leading banks in India, Middle East, Africa and Europe. Infosys total employee force stands at 149,994 and the companys TTM revenues stood at INR337.3bn (USD6.9bn).

Investment Theme
Infosys, in the recent past, lost market share to peers like TCS and HCL Technologies due to lack of strong presence in Infrastructure management services, lack of presence in emerging geographies and its aversion to provide flexibility in structuring contracts and offer discounted pricing to clients. The restructuring exercise also led to some distractions which led to slower growth compared to peers. We believe, it is unlikely to make a strong come back and bridge the gap in revenue growth with peers.

Key Risks
Key risks to our investment theme include IT spending picks up and Infosys sheds its conservatism and bids aggressively for large deals and improves its win rate.

Edelweiss Securities Limited

Infosys

Financial Statements
Income statement Year to March Net revenue Cost of revenues Gross profit Total SG&A expenses S&M expenses G&A expenses EBITDA Depreciation & Amortization EBIT Other income Profit before tax Provision for tax Core profit Extraordinary income/ (loss) Profit after tax Profit after minority interest Basic shares outstanding (mn) Basic EPS (INR) Diluted equity shares (mn) Diluted EPS (INR) CEPS (INR) Dividend per share (INR) Dividend (%) Dividend payout (%) Common size metrics - as % of net revenues Year to March Cost of revenues Gross margin G&A expenses S&M expenses SG&A expenses EBITDA margins EBIT margins Net profit margins Growth ratios (%) Year to March Revenues EBITDA EBIT PBT Net profit EPS FY10 227,420 120,710 106,710 28,100 11,840 16,260 78,610 9,050 69,560 9,040 78,990 16,810 62,180 480 62,660 62,660 570 109.0 571 108.9 126.0 25.1 502.7 22.9 FY11 275,010 150,620 124,390 34,830 15,120 19,710 89,560 8,540 81,020 11,690 93,130 24,900 68,230 68,230 68,230 571 119.5 571 119.4 134.4 37.6 750.0 31.4 FY12 337,340 188,790 148,550 41,470 17,570 23,900 107,080 9,290 97,790 18,520 116,830 33,670 83,160 83,160 83,160 571 145.5 571 145.5 161.8 32.0 640.0 22.0 FY13E 386,174 218,949 167,225 47,113 20,081 27,032 120,112 11,585 108,526 19,006 127,532 35,709 91,823 91,823 91,823 571 160.7 571 160.7 181.0 57.6 1,150.0 35.8 (INR mn) FY14E 423,766 246,726 177,039 50,663 23,542 27,121 126,376 12,713 113,663 22,934 136,597 36,608 99,989 99,989 99,989 571 175.0 571 175.0 197.2 57.6 1,150.0 32.9

FY10 53.1 46.9 5.2 7.1 12.4 34.6 30.6 27.3

FY11 54.8 45.2 5.5 7.2 12.7 32.6 29.5 24.8

FY12 56.0 44.0 5.2 7.1 12.3 31.7 29.0 24.7

FY13E 56.7 43.3 5.2 7.0 12.2 31.1 28.1 23.8

FY14E 58.2 41.8 5.6 6.4 12.0 29.8 26.8 23.6

FY10 4.8 9.3 8.1 14.4 3.8 4.3

FY11 20.9 13.9 16.5 17.9 9.7 9.7

FY12 22.7 19.6 20.7 25.4 21.9 21.9

FY13E 14.5 12.2 11.0 9.2 10.4 10.4

FY14E 9.7 5.2 4.7 7.1 8.9 8.9

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IT
Balance sheet As on 31st March Equity capital Share premium account Reserves & surplus Shareholders funds Sources of funds Gross block Accumulated depreciation Net block Capital work in progress Deferred tax asset Goodwill Investments Sundry debtors Cash and equivalents Loans and advances Total current assets Sundry creditors and others Provisions Total current liabilities & provisions Net current assets Uses of funds Book value per share (INR) Free cash flow Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metrics Year to March Cash flow from operations Cash for working capital Operating cash flow Net purchase of fixed assets Net purchase of investments Others in Cash Flow Metrics Investing cash flow Dividends Proceeds from issue of equity Financing cash flow Exchange rate differences Net cash flow (INR mn) FY14E 2,860 30,890 415,967 449,717 449,717 117,800 60,508 57,292 5,000 13,940 11,660 234 68,499 316,915 48,902 434,316 34,373 38,353 72,725 361,591 449,717 787.0 (INR mn) FY14E 99,989 12,713 (22,934) 89,768 7,440 82,328 14,500 67,828

FY10 2,860 30,270 197,360 230,490 230,490 69,230 28,930 40,300 4,090 2,000 9,160 37,120 34,940 105,560 41,870 182,370 23,430 21,120 44,550 137,820 230,490 403.6

FY11 2,860 30,620 226,280 259,760 259,760 75,850 32,660 43,190 5,250 3,210 9,160 1,440 46,530 150,950 53,200 250,680 26,770 26,400 53,170 197,510 259,760 454.6

FY12 2,860 30,890 300,860 334,610 334,610 90,300 36,210 54,090 13,940 11,660 120 58,820 209,680 33,960 302,460 23,100 24,560 47,660 254,800 334,610 585.6

FY13E 2,860 30,890 354,331 388,081 388,081 102,800 47,795 55,005 5,500 13,940 11,660 156 63,481 264,584 40,752 368,816 28,644 38,353 66,997 301,820 388,081 679.2

FY10 62,660 9,050 670 (8,870) 63,510 1,470 62,040 2,510 59,530

FY11 68,230 8,540 (14,950) 61,820 14,300 47,520 7,780 39,740

FY12E 83,160 9,290 (28,800) 63,650 (1,440) 65,090 9,200 55,890

FY13E 91,823 11,585 (19,006) 84,403 (7,884) 92,287 18,000 74,287

FY10 62,440 (400) 62,040 (6,200) (38,710) 8,710 (36,200) (15,740) 890 (14,850) 190.0 11,180

FY11 61,800 (14,280) 47,520 (13,050) 35,550 11,480 33,980 (36,640) 240 (36,400) 450.0 45,550

FY12E 63,650 1,440 65,090 (11,700) 1,320 18,070 7,690 (21,344) 270 (21,074) 51,706

FY13E 84,403 7,884 92,287 (18,000) (36) 19,006 970 (38,353) (38,353) 54,904

FY14E 89,768 (7,440) 82,328 (14,500) (78) 22,934 8,356 (38,353) (38,353) 52,331

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Infosys
Profitability & efficiency ratios Year to March ROAE (%) ROACE (%) Debtors days Payable days Cash conversion cycle (days) Current ratio Operating ratios Year to March Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBITDA (x)+1 yr forward Dividend yield (%) FY10 30.1 37.0 58 35 23 4.1 FY11 27.8 35.9 54 33 21 4.7 FY12 28.0 33.0 57 27 30 6.3 FY13E 25.4 30.0 58 24 33 5.5 FY14E 23.9 27.1 57 27 30 6.0

FY10 1.1 5.7 1.1

FY11 1.1 6.6 1.1

FY12 1.1 6.9 1.1

FY13E 1.1 7.1 1.1

FY14E 1.0 7.5 1.0

FY10 108.9 4.3 126.0 25.3 6.8 5.4 18.1 13.7 0.9

FY11 119.4 9.7 134.4 23.0 6.1 4.4 15.8 11.4 1.4

FY12 145.5 21.9 161.8 18.9 4.7 3.4 12.7 9.7 1.2

FY13E 160.7 10.4 181.0 17.1 4.0 2.9 10.9 8.8 2.1

FY14E 175.0 8.9 197.2 15.7 3.5 2.5 9.9 2.1

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RATING & INTERPRETATION

Company
ECLERX SERVICES Hexaware Technologies Infosys Mphasis Rolta India Wipro

Absolute reco
BUY BUY HOLD HOLD BUY HOLD

Relative reco
SO SO SP SP SP SU

Relative risk
M M L M H L

Company
HCL Technologies Info Edge Infotech Enterprises Patni Computer Systems Tata Consultancy Services

Absolute reco
BUY REDUCE BUY HOLD BUY

Relative reco
SO SU SO SU SO

Relative Risk
H M H M L

ABSOLUTE RATING
Ratings Buy Hold Reduce Expected absolute returns over 12 months More than 15% Between 15% and - 5% Less than -5%

RELATIVE RETURNS RATING

Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return

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Infosys
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (91-22) 4009 4400, Email: research@edelcap.com
Vikas Khemani Nischal Maheshwari Head Institutional Equities Co-Head Institutional Equities & Head Research vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +91 22 2286 4206 +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): IT

ECLERX SERVICES, HCL Technologies, Hexaware Technologies, Infosys, Info Edge, Infotech Enterprises, Mphasis, Patni Computer Systems, Rolta India, Tata Consultancy Services, Wipro

Recent Research Date 04-Apr-12 03-Apr-12 Company eClerx Services IT - Q4FY12 Result Preview Oracle Financial Services Title Price (INR) 735 Recos Buy

Deceleration ahead, but still remains healthy; Visit Note Infosys to update on demand realities; Sector Update Witnessing initial signs of demand pick-up; Visit Note

28-Mar-12

2,585

Not Rated

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * 1 stocks under review > 50bn Market Cap (INR) 114 104 Hold 60 Reduce 18 Total 183 < 10bn 11 Rating Interpretation Rating Buy Hold Reduce 58 Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period

Between 10bn and 50 bn

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