Dismal Performance On All Counts

Infosys Q1FY13 performance was disappointing on all counts revenue, margin and net profit. Revised FY13 guidance is far from encouraging, with a 5% reduction in US dollar (USD) guidance, but a mere 3.1% increase in rupee EPS guidance (at the upper end) in spite of taking Rs55/USD as conversion rate (Rs50.88 earlier). The fact that it has discontinued quarterly guidance is another indicator that the business environment is changing for the worse. Consequently, the stock witnessed an 8% battering on the bourses today. Nirmal Bang believes any arguments stating low expectations for buying the stock are flawed, particularly when Infosys is unable to meet even watered-down expectations. They downgrade the stock to Sell with a revised target price of Rs2,129 (Rs2,473), implying a PE multiple of 12.5x FY13E EPS. Nirmal Bang has downgraded their PE multiple to 12.5x, given the worsening revenue visibility and consistent earnings disappointments over the past several quarters.

Pricing cut, one-time provision and adverse cross-currency reduce revenue: Infosys reported a 1.1% QoQ decline in USD revenue to USD1,752mn (Nirmal Bang's estimate USD1,768mn); this was impacted by a 3.8% QoQ decline in pricing, USD13mn cross-currency impact and a one-time USD15mn provision for cancellation of a contract by a Europe-based utilities client. The pricing cut was due to a portfolio change (lower consulting revenue) and pricing renegotiations with clients in the financial services vertical. Volume grew 2.7% QoQ (Nirmal Bang's estimate 0.4% QoQ). This is an indication that the IT major is willing to sacrifice pricing for volume, something Nirmal Bang would wait one more quarter to confirm. Infosys' largest vertical - financial services and insurance (FSI) declined 1% QoQ, while the energy & utilities and communications & services (ECS) declined by a steep 8.4% QoQ owing to the one-time provision made. Overall, it has been a disheartening performance by Infosys.

Margins fall on price cut: Infosys reported a 201bps QoQ fall in margins to 30.6% (below Nirmal Bang's estimate by 118bps, below consensus by 242bps) owing mainly to the pricing cut and this negated benefits from rupee depreciation. This resulted in a 1.3% QoQ fall in net profit to Rs22.9bn, below their and consensus estimates by 1.6% and 5.9%, respectively.

Discontinues quarterly guidance on poor visibility, revised guidance disappointing, downgrade stock to Sell: Infosys has discontinued giving quarterly guidance due to poor revenue visibility. Its revised FY13 guidance was disappointing (5% YoY vs Nirmal Bang's expectation of 6.8-8.8%) mainly on lower pricing. Rupee revenue growth and EPS guidance were also disappointing, at 19.7% YoY (their expectation was over 25%) and Rs166.46 (their expectation Rs175), respectively. Nirmal Bang downgrades the stock to Sell with a revised TP of Rs2,129 (Rs2,473 earlier), implying a PE multiple of 12.5x FY13E EPS.