Infosys Q1 FY 201412.07.13

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Infosys | 1QFY2014 Result Update

July 12, 2013 2

Exhibit 1:1QFY2014 performance (IFRS, consolidated)(` cr) 1QFY14 4QFY13 % chg (qoq) 1QFY13 % chg (yoy) FY2013 FY2012 % chg (yoy)Net revenue 11,267 10,454 7.8 9,616 17.2 40,352 33,733 19.6Cost of revenue 7,000 6,494 7.8 5,560 25.9 24,158 18,877 28.0Gross profit 4,267 3,960 7.8 4,056 5.2 16,194 14,856 9.0

SG&A expenses 1,284 1,190 7.9 1,113 15.4 4,643 4,147 12.0

EBITDA 2,983 2,770 7.7 2,943 1.4 11,551 10,709 7.9Depreciation 319 308 3.6 250 27.6 1,122 931 20.5

EBIT 2,664 2,462 8.2 2,693 (1.1) 10,429 9,778 6.6

Other income 577 674 476 2,359 1,904

PBT 3,241 3,136 3.3 3,169 2.3 12,788 11,683 9.5

Income tax 867 742 16.8 880 (1.5) 3,367 3,368 (0.0)

PAT 2,374 2,394 (0.8) 2,289 3.7 9,421 8,315 13.3EPS 41.5 41.9 (0.8) 40.1 3.7 164.9 145.5 13.3

Gross margin (%) 37.9 37.9 - 42.2 (431)bp 40.1 44.0 (391)bp

EBITDA margin (%) 26.5 26.5 (2)bp 30.6 (413)bp 28.6 31.7 (312)bp

EBIT margin (%) 23.6 23.6 9bp 28.0 (436)bp 25.8 29.0 (314)bp

PAT margin (%) 20.0 21.5 (147)bp 22.7 (264)bp 22.1 23.3 (128)bp

Source: Company, Angel Research

Exhibit 2:1QFY2014 Actual vs Angel estimates(` cr) Actual Estimate % Var.Net revenue 11,267 11,217 0.4

EBITDA margin (%) 26.5 27.6 (112)bp

PAT 2,374 2,403 (1.2)


Topline provides a pleasant surprise

Infosys reported healthy set of results for 1QFY2014. Its dollar revenues grew by

2.7% qoq (against an estimate of 1.5% qoq) to US$1,991mn, aided by 4.1% qoq

volume growth led by recovery in application development and consulting

revenues. Pricing went down by 0.7% qoq due to negative cross currency

movement. Cross currency movement impacted the companys USD revenue

negatively by US137mn. Revenue in constant currency (CC) terms came in atUS$2,005mn, up 3.4% qoq. The overall volume growth was robust at 4.1% qoq

5.8% onsite volume growth and 3.3% offshore volume growth. Reported pricing

went down by 0.5% qoq for onsite and 2.3% qoq for offshore projects. In INR

terms, revenue came in at `11,267cr, up 7.8% qoq.

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July 12, 2013 3

Exhibit 3:Trend in volume growth (Effort wise)

2.9

3.6

1.3

0.5

3.3

2.3

4.4

3.7

4.8

5.8

2.7

3.8

2.0 1.8

4.1

0

2

4

6

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

(%)

Offshore Onsite Total volume growth


Exhibit 4:Trend in volume and revenue growth (qoq)

(0.4)

2.4

5.8

1.7

3.4

2.7

3.8

2.0 1.8

4.1

(2)

0

2

4

6

8


(%)

Revenue growth (cons tant currency) Volume growth


Service wise, revenue growth was led by consulting and systems integration, the

revenue from which grew by 5.6% qoq. Revenue from one of the companys

anchor service verticals - application development grew by 4.1% qoq, whilerevenues from application maintenance declined by 0.4% qoq. The company is

again regaining focus on traditional bread and butter IT services which are a part

of business operations. IMS, which has been showing robust traction in the past

three quarters, posted negligible growth during 1QFY2014. Revenues from BPO

and PES services grew by 0.8% and 2.7% qoq, respectively. Infosys BPO has been

performing considerably well since the past few quarters and the Management has

indicated at trying to draw ~US$1bn of revenue from it in the next two years from

~US$400mn currently.

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July 12, 2013 4

Exhibit 5:Growth trend in service verticals (Reported basis)Particulars % to revenue % growth qoq % growth yoyBusiness operations 61.0 1.7 8.3

Application development 15.7 4.1 4.3Application maintenance 19.3 (0.4) 4.9

Infrastructure management services (IMS) 7.0 (0.1) 20.5

Testing services 8.4 4.0 15.0

Business process management (BPO) 5.1 0.8 18.3

Product engineering services (PES) 3.2 2.7 3.9

Others 2.3 2.7 (3.2)

Consulting and systems integration 33.6 5.6 27.7Products, platforms and solutions 5.4 (2.7) 0.6

Products 3.7 (5.0) (6.6)

Others 0.5 28.4 89.4


Industry-wise, the revenue from financial services and insurance (FSI), the

companys anchor industry vertical contributing 33.7% to revenue, grew by 2. 1%

qoq, led by a 2.7% qoq growth in revenue from insurance. Revenues from banking

and financial services vertical grew by 2.0%, qoq. In CC terms, revenue from FSI

grew by 2.9% qoq. The Management indicated that business prospects will remain

muted in the near term for discretionary spend in the FSI vertical. The spending

from banks and financial institutions is coming from work related to risk

compliance, cost cutting, customer centric applications, cloud and risk

management. Also, the company is witnessing pricing challenges in this industryvertical in some of the large deals coming in.

Manufacturing (contributed 22.5% to revenue) posted a 4.1% qoq revenue growth.

In CC terms, revenue from this vertical grew by 4.5% qoq. The company is seeing

IT spending coming in the manufacturing industry segment from clients in terms of

work related to harmonizing processes and transformation to gain cost efficiency

and simplicity. The Management indicated that budgets in manufacturing sub-

segments such as aerospace, auto and hi-tech are flat to marginally down. The

company expects revenues from manufacturing to pick up in H2FY2014, as the

large inventory pile up finishes off at the clients ends and production picks up.

The retail, CPG and logistics (RCL) segment (contributed 24.7% to revenue)

reported 6.2% qoq revenue growth and emerged as the primary growth driver for

the company. Revenues from retail & CPG and transport & logistics grew by 5.4%

and 2.7% qoq, respectively. In CC terms, the revenue from RCL grew by 6.7% qoq.

In this industry segment, retail is gaining traction on account of spends related to

digital commerce, digital marketing and clients targeting to go global. Modest

growth from products and platforms is being seen from this industry.

The energy utilities, communications & services (ECS) segment (contributed 19.1%

to revenue) reported a 1.9% qoq decline in its revenues due to 3.2% and 6.1% qoq

decline in revenues from energy & utilities and communication & services industriesrespectively. In energy and utilities, the Management indicated that barring oil and

few utility companies, growth will remain subdued in the near-term. In CC terms,

revenue from this segment declined by 0.6% qoq.

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July 12, 2013 5

Exhibit 6:Growth trend in industry segments (Reported basis)Particulars % to revenue % growth qoq % growth yoyFSI 33.7 2.1 11.7

Banking and financial services 27.0 2.0 10.8Insurance 6.7 2.7 15.4

Manufacturing 22.5 4.1 16.2RCL 24.7 6.2 18.4

Retail and CPG 15.8 5.4 6.2

Transport and logistics 1.8 2.7 20.3

Life Sciences 4.7 0.6 44.4

Healthcare 2.4 29.8 94.8

ECS 19.1 (1.9) 8.5Energy and utilities 4.9 (3.2) 21.1

Communication and services 8.5 (6.1) (4.4)

Others 5.7 6.5 22.2


In terms of geographies, revenue growth was primarily led by emerging

geographies (rest of the world), revenues from which grew by 6.5% in CC terms.

Revenues from North America also grew at a decent rate of 5.0% qoq in CC

terms. Revenue from Europe declined by 2.4% (CC terms) as Infosys closed few

projects in that geography during the quarter.

Exhibit 7:Growth trend in geographies (CC basis)

1.7 2.2 1.60.1

5.0

(7.2)

5.1

14.4

6.5

(2.4)

2.2 1.8

7.4

(1.5)

6.5

(10)

(5)

0

5

10

15

20


(%)

North America Europe Rest of the world


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July 12, 2013 6

Hiring and utilization

Infosys added 10,138 gross employees in 1QFY2014, of which 3,008 were lateral

additions. The net addition number for the quarter stood at 575. Attrition, on last

twelve month (LTM) basis, grew to 16.9% in 1QFY2014 from 16.3% in 4QFY2013.

The Management indicated that hiring going ahead will be based on business

needs and is currently more focused towards improving the utilization level. The

company is trying to inch up its utilization level going forward, which could act as

one of the margin levers.

Exhibit 8:Employee metrics1QFY13 2QFY13 3QFY13 4QFY13 1QFY14

Gross addition 9,236 10,420 8,390 8,990 10,138

Net addition 1,157 2,610 1,868 1,059 575

Gross lateral emp. addition 5,233 3,656 4,351 3,545 3,008Attrition LTM basis (%) 14.9 15.0 15.1 16.3 16.9


With companys focus on improving the utilization level, utilization rate, including

as well as excluding trainees, grew by 150bp and 200bp qoq to 72.4% and

75.9%, respectively.

Exhibit 9:Trend in utilization

67.2

69.670.1

70.9

72.4

71.6

73.3 73.2 73.9

75.9

65

67

69

71

73

75

77


(%)

Including trainees Excluding trainees


Margin stable

The companys EBITDA and EBIT margin inched up slightly by 2bp and 9bp qoq to

26.5% and 23.6%, respectively. The gains from rupee depreciation in margin got

absorbed due to negative impact of wage hike given to sales team from May 2013

of ~8% and onsite wage hikes given in February 2013. The Management

indicated that the company has given ~8% offshore and ~3% onsite wage hike

from 1 July, 2013 which will again impact the operating margin negatively by

~300bp in 2QFY2014.

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July 12, 2013 7

Exhibit 10:Trend in EBITDA margin

(201) (151)

(60)

(199)

(2)30.6

29.1

28.5

26.526.5

24

25

26

27

28

29

30

31

(250)

(200)

(150)

(100)

(50)

0


(%)

(BP)

Margin movement (qoq) EBITDA margin (%)


Client pyramid

Infosys added 66 new clients during the quarter, taking its total active client base

to 836. The company witnessed addition of three clients in US$100mn-200mn

revenue bracket. The company growth during the quarter was led by revenue

growth from its top clients. Revenues from the top 1/5/10 clients grew by

11.3%/ 4.1%/ 2.7% qoq, respectively.

Exhibit 11:Client metricsParticulars 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14Top client (% of revenue) 4.1 4.0 3.6 3.6 3.9

Client addition 51 39 89 56 66

Active client 711 715 776 798 836

US$1mn5mn 204 208 210 235 251

US$5mn10mn 67 71 73 76 76

US$10mn20mn 49 52 55 57 57

US$20mn50mn 42 42 41 40 41

US$50mn100mn 29 29 28 28 26

US$100mn200mn 9 8 9 9 12

US$200mn-300mn 2 3 3 3 3

US$300mn plus 1 - - - -


Investment arguments

Guidance maintained: Infosys has maintained its FY2014 USD revenue growthguidance at 6-10%. The guidance range continues to remain wide due to

economic uncertainty and is lower than the software industry body Nasscoms

estimate of 12-14%. In INR terms, the company has given revenue guidance of

13-17% (assuming USD/INR rate at 59.39). The management opined that they are

cautiously optimistic for the rest of the year. We believe a healthy 1QFY2014

performance increases the probability of achieving/beating the top end of the

guidance. Post 1QFY2014 results, Infosys requires ~1.4% CQGR for the

remaining quarters to meet its upper end of the guidance which we believe the

company can possibly achieve.

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July 12, 2013 8

Pricing pressure foreseen in near term: The Management commentary indicatesthat the environment remains challenging and the company continues to see

pricing pressure in large deals coming in re-bid market space because of

competitive intensity. Management indicated that these deals are margin dilutive inthe beginning but become margin neutral going ahead. Over FY2013-15E, we

expect USD and INR revenue CAGR of 9.2% and 12.6%, respectively.

Operating margins to be under pressure: The company is now highly focused ongrowth and this may lead to sacrifice margins in the near term. The operating

margin has got tailwind of rupee depreciation but it currently faces headwinds

because of the following reasons 1) offshore as well as onsite wage hike effective

from July 2013, 2) single digit margin profile of Lodestone, 3) pick up in onsite

hiring and 4) pricing pressure seen for traditional IT services. Infosys posted stable

margins during 1QFY2014 after five quarters of consecutive decline seen in the

margins. In 2QFY2014, management indicated that wage hikes will impact thecompanys operating margin by ~300 on a sequential basis. Going ahead, we

expect EBIT margin of Infosys to decline to 23.4% and 23.6% for FY2014 and

FY2015, respectively from 25.8% in FY2013. Over FY201315E, we expect EBIT

CAGR of 7.5%.

Outlook and valuation

The companys Management continues to remain cautiously optimistic on the

business environment. The fact that there is nothing really incrementally negative in

terms of their numbers is encouraging. With the current set of results, clearly the

stock has got rewarded but this performance cannot be perceived as abreakthrough performance unless it is consistent for one more quarter. The

company signed seven large deals during the quarter with TCV exceeding

US$600mn.

Considering Infosys current quarter results as well as management commentary, it

seems that some parts of Infosys' new strategy are working, although numbers

could remain volatile in the near term. The companys stock price has corrected by

~22% today, which is its highest ever fall in a single trading session in the last

decade. The stock has ran up significantly today on the back of better than

expected 1QFY2014 performance and at the CMP of `2,803, the stock is trading

at 16.4x and 14.8x its FY2014E and FY2015E EPS, respectively. We value thestock at 15x FY2015E EPS of `189.4, which gives us a target price of `2820. Wemaintain our Neutral rating on the stock.

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July 12, 2013 9

Exhibit 12:Key assumptionsParameters FY2014 FY2015Revenue growth USD terms (%) 9.5 9.0

USDINR rate 58.0 58.0Revenue growth INR terms (%) 16.5 8.9

EBITDA margin (%) 26.2 26.4

Tax rate (%) 27.7 28.5

EPS growth (%) 3.9 10.5


Exhibit 13:Change in estimatesFY2014 FY2015

Parameter Earlier Revised Variation Earlier Revised Variation(` cr) estimates estimates (%) estimates estimates (%)Net revenue 45,153 47,001 4.1 48,993 51,196 4.5

EBITDA 12,456 12,295 (1.3) 13,145 13,492 2.6

PBT 2,420 2,558 5.7 3,103 3,069 (1.1)

Tax 13,611 13,534 (0.6) 14,876 15,127 1.7

PAT 3,862 3,749 (2.9) 4,165 4,311 3.5


Exhibit 14:One-year forward PE (x)

500

1,100

1,700

2,300

2,900

3,500

4,100

4,700

A

pr-07

O

ct-07

A

pr-08

O

ct-08

A

pr-09

O

ct-09

A

pr-10

O

ct-10

A

pr-11

O

ct-11

A

pr-12

O

ct-12

A

pr-13

(`)

Price 26x 22x 18x 14x 10x


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July 12, 2013 10

Exhibit 15: Recommendation summary

Company Reco CMP Tgt. price Upside FY2015E FY2015E FY2012-15E FY2015E FY2015E(`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (x) RoE (%)

HCL Tech Neutral 860 - - 22.0 13.6 20.7 1.6 21.7Hexaware Accumulate 97 105 8.6 19.8 8.2 9.6 1.0 22.3

Infosys Neutral 2,803 - - 26.4 14.8 9.2 2.4 19.3Infotech Enterprises Neutral 183 - - 17.7 8.1 15.9 0.5 14.0

KPIT Cummins Accumulate 127 144 13.3 16.7 8.8 21.6 0.7 16.7

Mindtree Neutral 911 - - 20.2 9.4 21.8 0.9 19.5

Mphasis Neutral 413 - - 18.2 9.5 4.9 0.7 14.2

NIIT Buy 19 30 58.3 9.1 3.5 (7.1) (0.0) 11.9

Persistent Buy 510 595 16.6 26.2 8.6 19.0 0.7 16.7

TCS Neutral 1,606 - - 28.7 17.6 18.9 3.4 28.1

Tech Mahindra Accumulate 1,122 1,250 11.4 19.1 9.6 11.4 1.6 18.9

Wipro Neutral 376 - - 21.4 12.5 9.7 1.4 19.0


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July 12, 2013 11

Company Background

Infosys is the second largest IT company in India, employing over 1,55,000

professionals. The company services more than 800 clients across various verticals,

such as financial services, manufacturing, telecom, retail and healthcare. Infosys

has the widest portfolio of service offerings amongst Indian IT companies,

spanning across the entire IT service value chain - from traditional application

development and maintenance to consulting and package implementation to

products and platforms.

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July 12, 2013 12

Profit and loss statement (IFRS, consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015ENet sales 27,501 33,733 40,352 47,001 51,196Cost of revenue 15,054 18,877 24,158 29,337 31,970Gross profit 12,447 14,856 16,194 17,665 19,226

% of net sales 45.3 44.0 40.1 37.6 37.6

Selling and mktg exp 1,512 1,757 2,034 2,418 2,560

% of net sales 5.5 5.2 5.0 5.1 5.0

General and admin exp. 1,971 2,390 2,609 2,951 3,174

% of net sales 7.2 7.1 6.5 6.3 6.2

EBITDA 8,964 10,709 11,551 12,295 13,492% of net sales 32.6 31.7 28.6 26.2 26.4

Dep. and amortization 862 931 1,122 1,320 1,433

% of net sales 3.1 2.8 2.8 2.8 2.8

EBIT 8,102 9,778 10,429 10,976 12,059% of net sales 29.5 29.0 25.8 23.4 23.6

Other income 1,211 1,904 2,359 2,558 3,069

Profit before tax 9,313 11,683 12,788 13,534 15,127

Provision for tax 2,490 3,368 3,367 3,749 4,311

% of PBT 26.7 28.8 26.3 27.7 28.5

PAT 6,823 8,315 9,421 9,785 10,816Minority interest - - - - -

Adj. PAT 6,823 8,315 9,421 9,785 10,816EPS (`) 119.5 145.5 164.9 171.3 189.4

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July 12, 2013 14

Cash flow statement (IFRS, consolidated)

Y/E March (` cr) FY2011 FY2012 FY2013 FY2014E FY2015EPre-tax profit from operations 8,102 9,778 10,429 10,976 12,059

Depreciation 862 931 1,122 1,320 1,433Pre tax cash from ops. 8,964 10,709 11,551 12,295 13,492

Other income/prior period ad 1,211 1,904 2,359 2,558 3,069

Net cash from operations 10,175 12,614 13,910 14,853 16,561

Tax 2,490 3,368 3,367 3,749 4,311

Cash profits 7,685 9,246 10,543 11,104 12,249(Inc)/dec in current assets (1,808) (2,399) (2,464) (894) (1,119)

Inc/(dec) in current liab. 448 1,125 1,520 500 444

(Inc)/dec in net trade WC (1,360) (1,274) (944) (394) (675)

Cashflow from operating activities 6,325 7,972 9,599 10,710 11,575(Inc)/dec in fixed assets (1,267) (1,496) (2,181) (1,500) (1,500)

(Inc)/dec in investments 3,602 (233) (1,362) - -

(inc)/dec in sale of financial assets (23) 11 (382) - -

(Inc)/dec in deferred tax assets (348) 18 (242) (100) (100)

Inc/(dec) in other non-current liab. (37) (198) 147 - -

(Inc)/dec in other non-current ass. (104) 8 (1,253) (219) (925)

Cashflow from investing activities 1,823 (1,890) (5,273) (1,819) (2,525)Inc/(dec) in debt - - - - -

Inc/(dec) in eq./premium (1,256) (1,155) (280) 1,036 (0)

Dividends 2,337 1,002 2,805 2,672 2,672

Cashflow from financing activities (3,593) (2,157) (3,085) (1,636) (2,672)Cash generated/(utilized) 4,555 3,925 1,241 7,255 6,377Cash at start of the year 12,111 16,666 20,591 21,832 29,087

Cash at end of the year 16,666 20,591 21,832 29,087 35,465

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July 12, 2013 15

Key ratios

Y/E March FY2011 FY2012 FY2013 FY2014E FY2015EValuation ratio (x)P/E 23.5 19.3 17.0 16.4 14.8P/CEPS 20.9 17.3 15.2 14.4 13.1

P/BVPS 5.9 4.8 4.0 3.3 2.9

Dividend yield (%) 1.2 0.5 1.5 1.4 1.4

EV/Sales 5.2 4.1 3.4 2.8 2.4

EV/EBITDA 16.0 13.0 11.8 10.5 9.1

EV/Total assets 4.6 3.6 3.0 2.4 1.9

Per share data (`)EPS 119 146 165 171 189

Cash EPS 134 162 184 194 214

Dividend 35 15 42 40 40

Book value 477 585 696 838 981

DuPont analysisTax retention ratio (PAT/PBT) 0.7 0.7 0.7 0.7 0.7

Cost of debt (PBT/EBIT) 1.1 1.2 1.2 1.2 1.3

EBIT margin (EBIT/sales) 0.3 0.3 0.3 0.2 0.2

Asset turnover ratio (sales/assets) 0.9 0.9 0.9 0.9 0.8

Leverage ratio (assets/equity) 1.1 1.1 1.2 1.1 1.1

Operating ROE 25.0 24.9 23.7 20.4 19.3

Return ratios (%)RoCE (pre-tax) 25.9 25.5 22.5 20.0 19.0

Angel RoIC 56.1 56.3 45.8 45.4 45.7

RoE 25.0 24.9 23.7 20.4 19.3

Turnover ratios (x)Asset turnover (fixed assets) 3.6 4.2 3.7 4.1 4.1

Receivables days 78 84 86 78 78

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Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement Infosys

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Infosys Q1 FY 201412.07.13