Infosys Q1 FY 2011-2012 results disappoints the market
Infosys, the second biggest IT services company in India, has reported a 3.2% Q-o-Q growth in its sales but a decline of 5.3% Q-o-Q in its net profit in Q1 FY2011-12 results. Here is our analysis of the results.
Q1 FY 2011-2012 Results Analysis
- Sales grew by 3.2% QoQ during 1QFY12. Operating margins witnessed a decline of 2.9% QoQ to 26.1% during the quarter as compared to 29% recorded in the previous quarter. This was on account of higher cost of sales (as a percentage of sales).
- Decline in operating margins offset the positive impact of higher other income as well as lower tax outflow. As a result, net profits declined by 5.3% QoQ.
- The company added 26 new clients during the quarter taking the total number of active clients to 628.
- Guidance: The management expects sales to grow by 15.5%-17.5% YoY and EPS to grow by 7.3%-8.9% YoY. The EPS guidance is slightly higher than the 5.5%-7.3% range guided at the beginning of the current fiscal year.
Verdict
At the current price of around Rs 2800, the stock is trading at a multiple of 14.3 times our estimated FY14 earnings. The management maintains a cautiously positive outlook for the company despite the overall slowdown in the global economic scenario. Particularly with reference to Europe, the management stated that the macro factors remain gloomy. However, with respect to each of the business lines, the management does not see a major impact. This is visible in the healthy pipeline that the company has with respect to Europe. With respect to discretionary spending, the management stated that it is seeing an uptick in the same particularly for the retail, auto, energy and BFSI segments
With respect to margins, the management stated that the margins in the current quarter were negatively impacted by the wage increase. The company has increased wages by 6-8% for the onsite staff and by 2-3% for the offshore staff. For the full year 2012, the management expects margins to decline due to the impact of higher wages as well as due to lower utilization rates and currency movements. The company currently has a utilization rate lower than its normal rates. This is due to the fact that the company has strategically increased its employee base to take advantage of a reversal in the global trends.
Going forward, growth would largely be led by the volumes, while pricing is expected to remain stable at current levels. You can BUY Infosys from a 2-3 years perspective for around 15% annual returns.
