1. Credit Suisse neutral rating on Infosys; Right on turnaround track

Credit Suisse neutral rating on Infosys; Right on turnaround track

Management expects industry-leading growth by mid-FY17

By: | Updated: July 27, 2015 10:31 AM

Infosys reported a positive set of numbers for Q1FY16 that will signal for now at least that the turnaround is on the right track.

Infosys reported a positive set of numbers for Q1FY16 that will signal for now at least that the turnaround is on the right track. A key factor that has been tracked for the company has been a pick up in revenue growth, which could lead to industry-leading levels. Revenue growth was quite strong at 4.4% in constant currency, ahead of ours and consensus’s expectations. About $7m or 30 basis point came through acquisitions. However, Q1 was on the back of a weak Q4FY15, when revenue declined by 0.4% quarter-on-quarter in constant currency terms.

Operating margins were at 24%, 170 bp down q-o-q, slightly above our estimates but in line with the street’s. There was an adverse 200 bp impact over wage increase, 60 bp impact on annual H1-B visa application charges and a 60 bp benefit on INR depreciation. The remainder was for operational reasons. The numbers should give broader comfort regarding the entire sector.

Revenue guidance maintained: Infosys has also maintained its FY16 revenue guidance of 10-12% in constant currency but the comfort around this will be higher now–the implied growth for each of the next three quarters is now 2.2%–3.3%. The USD growth guidance has been raised to 7.2%–9.2% (from 6.2%–8.2%), but that should be due to lower cross currency impact.


Attrition on the right track: We estimate that consolidated LTM (last twelve months) attrition is down to 21% from 22% in Q4 and over 23% in Q1FY15. We estimate this by adding the attrition for the preceding four quarters and dividing this by the average consolidated headcount at the beginning and end of the LTM period.

Consistency, industry-leading growth key now: Based on consensus earnings, Infosys’ discount to TCS is now only about 9% on FY16 earnings. For further relative outperformance and for growth rates (LTM) to consistency would be required, in our view. The management views organisational restructuring (large deal win teams, bringing business consultants in large deals, etc.) is showing results, but thinks that predictability on a quarterly basis could still take a bit more time. The management expects Infosys to touch industry-leading growth by mid-FY17.


We are increasing our target multiple to 18x 24 months forward earnings (a 20% discount to our target multiple for TCS) which moves our TP (target price) from Rs 1,050 to Rs 1,150. While both TCS and Infosys now have rich valuations, our relative preference remains with TCS—It is growing at a higher rate with higher margins off a larger base and has relatively underperformed this year as well.

Other Q1 highlights
* Volume increased by 5.4% q-o-q but blended realisation was down 0.8% q-o-q (on-site: -0.4%, offshore: -2.3%) in constant currency terms.
* The US and Rest of World revenues were up 5.1% and 9.9% q-o-q, in constant currency. European revenue grew at a moderate 0.7% rate. Q1 is seasonally weak for Infosys in Europe. The retail and manufacturing segments led growth (up 7.3% and 5.5% q-o-q in constant currency terms).
* Financial services and ECS (energy, utilities and communication) grew at 2.6% and 2.5%, respectively.
* Gross hiring was 11,889 and net headcount increased by 3,336, up 11% y-o-y—the highest since June 2012.
* Utilisation (IT services and consulting– ex-trainee) was up 160 bp q-o-q to 80.2%.
* Operating cash flow was $345m, down 26% y-o-y.
*  The closing cash balance was $4.8 bn

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