Recommendation: Buy
CMP = Rs 2,088 (as of Friday, April 13)
Price target: Rs 2,520
Result highlight
- For the fourth quarter of FY2007, the consolidated revenue of Infosys Technologies (Infosys) grew at a tepid rate of 3.2% quarter on quarter (qoq) and 43.8% year on year (yoy) to Rs3,772 crore. The company has not been able to meet the consensus estimate of a 5-6% sequential growth in the revenue and, for the first time, it could not achieve even the lower end of its own guidance.
- This essentially means that the company, known for its conservatism, couldn't manage even an unexpected 0.8% higher appreciation in the rupee (an average realisation of Rs43.75 against an assumption of Rs 44.11).
- The sequential decline of 100 basis points in its operating profit margin (OPM) to 31.7% has been largely contributed by the adverse impact of the appreciation in the rupee, higher selling, general and administration (SG&A) expenses and the sequential decline in the utilisation rate. On the other hand, the 1.7% sequential improvement in the billing rates positively affected the margins.
- The other income more than doubled to Rs119 core (up from Rs59 crore in Q3FY2007) due to significantly higher yield on investments during the quarter. The translation loss was also limited to just Rs5 crore which is quite commendable given the 1.8% appreciation in the rupee and sundry debtors in excess of $500 million.
- Consequently, the consolidated earnings grew at a relatively higher rate of 3.8% to Rs1,020 crore (excluding the tax write-back of Rs124 crore related to overseas locations in earlier years). This is again lower than street expectation of around Rs1,040 crore.
- On the full year basis, the revenue and earnings grew by 45.9% and 51.6% respectively. The OPM declined by 90 basis points to 31.6% in FY2007. However, the jump of 167.6% in the other income component boosted the overall growth in the earnings and resulted in a 100-basis-point improvement in the net margin to 26.8% (excluding one-time items).
- In terms of the FY2008 guidance, the company has been able to meet the street expectations for the growth in dollar terms. It has guided for consolidated revenue of $3.95-4.02 billion (a growth of 28-30%) and an earnings per share (EPS) growth in the range of 25.7-27.7%.
- However, given the rupee appreciation, the consolidated revenue in rupee terms is guided to grow at a relatively much lower rate of 22.6-24.6% (Rs17,038-17,308 crore). The EPS growth in rupee terms is guided in the range of 20-22% (Rs80.3-81.6) which factors in the adverse impact of the exchange rate fluctuations and around 3% dilution in the equity base during the fourth quarter.
- The EPS growth guidance is lower than the street expectations.
- The guidance for Q1FY2008 is all the more muted with the earnings guided to remain flat and EPS guided to decline by 1.4% (due to dilution of equity). The consolidated revenues are guided to grow in the range of 3.3-3.7% sequentially.
- I have revised downwards the earnings estimate for FY2008 by around 7% to factor in the dilution of the equity capital and appreciation of the rupee.
- I maintain the Buy call on the stock with a revised price target of Rs 2,520 (24x its FY2009 earnings estimate of Rs 105 per share).
