Recommendation: Buy (My Personal Favourite!)
CMP = Rs 1,600
Price target: Rs 2,135
Result highlights:
- Infosys Technologies (Infosys) reported a revenue growth of 4% quarter on quarter (qoq) and of 16.9% year on year (yoy) to Rs 4,271 crore in Q3FY2008. The sequential growth in the revenues was achieved on the back of a volume growth of 4.5% in its consolidated information technology (IT) service business, an increase of 0.8% qoq in its blended realisation and other scale benefits (0.6%). On the other hand, the rupee appreciation of 1.9% qoq adversely affected the growth in the revenues during the quarter.
- The operating profit margin (OPM) improved by 130 basis points sequentially to 32.6% in Q3FY2008. The OPM expanded due to the cumulative impact of an improvement in the blended realisation (up by 80 basis points), savings in overhead cost as a percentage of sales (a gain of 140 basis points) and a surge in the scale benefits (up 60 basis points). On the other hand, the rupee appreciation had a negative effect of around 80 basis points on the OPM.
- However, there were one-time items in Q3 that had a net adverse impact of around $6 million on the OPM: an expense of $26 million related to the settlement for overtime payment to certain employees in
- The revised guidance for FY2008 is also in line with the expectations. In dollar terms, the revenue growth guidance has been upgraded marginally to 35-35.2% (up from 34.5-35% guided in October 2007). The earnings growth guidance in dollar terms has been upgraded by around 1.5% to $2.02 per share (up from $1.98-1.99 per share in October 2007). In rupee terms, the upward revision in the revenue growth guidance was largely flat at Rs 16,627-16,651 crore (up from Rs 16,588-16,648 crore in October 2007) with an exchange rate assumption of Rs 39.41/USD. Including the tax write-back, the earnings growth guidance in rupee terms has been upgraded to Rs 81.07 per share (up from Rs 79.49-79.88 per share given in October last), which is in line with the consensus estimates.
- For Q4, the management has guided to a sequential growth of 4.8-5.4% in its consolidated revenues and a growth of around 3.5% qoq in the earnings per share (EPS) to Rs 21.38 as compared with the adjusted EPS of Rs 20.66 in Q3FY2008.
- In terms of operational highlights, the company reported a healthy net addition of 8,100 employees in Q3 and raised the guidance for gross employee addition to 31,000 for the full year (it does not include the addition of 1,500 employees from the Philips deal). The revenue growth of 8.6% in the banking and financial services (BFS) segment was also encouraging and the company was able to negotiate higher billing rates from some of its financial service clients during the quarter. It bagged nine large deals (worth over $50 million each) in Q3, including two clients from the financial service vertical.
- The management re-iterated that there is no material impact of the uncertainties in the
- I have maintained the exchange rate assumption at Rs 39.8 per USD in FY2008 and at Rs 39 per USD for FY2009 and have kept the earnings estimates largely unchanged. However, given the continued uncertainties and the lack of any short-term triggers, I don't expect any re-rating of the tech stocks in the coming months.
- At the current market price the stock trades at 19.8x its FY2008 and 16.5x its FY2009 earnings estimates. I maintain Buy recommendation on the stock with the a revised price target of Rs 2,135.
