Infosys: Change in pricing strategy - a new beginning?
Infosys reported another quarter of disappointing performance, missing Prabhudas Lilladher's/consensus expectation. Moreover, the disappointment got aggravated due to discontinuation of quarterly guidance. This is the third quarter in continuation when Infosys has missed their quarterly guidance. Infosys has cut their USD revenue guidance, but a deep dive in the number indicates no change in volume growth guidance. Prabhudas Lilladher revises their expectation downwards and cut TP to Rs2,850.
- Another weak quarter – How does it stack up? Infosys missed guidance in yet another quarter. The cross-currency impact (USD13m) and one-time revenue reversal (USD15m) due to project termination resulted in revenue decline of 1.1% QoQ to USD172m (PLe: USD1780m, Guid: USD1780m). The management continues to hint for growing uncertainty in the demand environment.
- Guidance – Near‐term visibility that matters most! Infosys stopped giving quarterly guidance despite having higher visibility of revenue in the near term (95%). However, they revised FY13 USD revenue guidance downward by 3.7% to 5% YoY growth. The downward revision in the USD revenue is attributed to 2% negative impact of cross currency and 3.7% impact due to pricing. In terms of volume in FY13, the guidance still holds at the previous level of ~9% YoY growth.
- Pricing – Is it a new beginning? The price declined by 3.7% QoQ (0.9% due to revenue reversal and 0.6% due to cross-currency impact). Their analysis indicates that the portfolio mix would have impacted margin ~30-40bps; hence, ~1.7% pricing discount is offered to the client. The pricing decline in the quarter is sharpest since Q3FY09. Prabhudas Lilladher see the spill over pricing cut to span over the next few quarters. However, they see this as an onset of new strategy (unstated though) to regain the lost ground. Prabhudas Lilladher may see a new beginning for the weaker pricing environment in the near term.
- Valuation & Recommendation – Retain ‘BUY’, with revised TP of Rs2, 850: Prabhudas Lilladher expects FY13 momentum to be in-line with guidance. They retain ‘BUY’ rating, with TP of Rs2,850, 17x FY13e earnings estimates.
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