LilladherPrabhudas Infosys

CMP: Rs3,560 TP: Rs4,040 Rating: BUY MCap: Rs2,036.2bn

Margin upgrades likely, Revenue to stay put: Revenue growth of 2% (1.5%@cc) QoQ was just short of expectation (Cons.: 2.2%, PLe: 2.5%). The beat to the EBIT margin was ahead of expectation even after adjusting for change in depreciation. Management continues to expect flattish margin for FY15 (YoY). We expect cost optimization to drive earnings upside in FY15.

Attrition high – Efforts to bear fruit with a lag: Infosys is seeing high attrition in the 0-3yrs experience bucket in-line with our expectation (Ref: “Attrition: HR faux-pas or Stumbling growth?”, May 23, 2014). Management has taken efforts to curb rising attrition by taking the following steps: 1) Improving compensation predictability i.e. returning to regular wage cycle 2) Awarding quarterly promotion to retain talent 3) Fast track career progression for high performers 4) Reducing variable pay for 0-3 yrs experience. We see these efforts as a move in the right direction; however, attrition is likely to spiral down with a lag. We anticipate attrition to spiral down in H2FY15.

Efforts to sharpen sales team: Infosys continues with their effort to sharpen the sales team. According to the management, the count declined due to involuntary attrition in H2FY14. The company is likely to hire 300 (172 joined) sales professionals from top 41 universities across the world. Moreover, they have shifted 150 professionals to account management role from production roles. We see more new strategic initiatives to prioritize investments in “Sales & Marketing” under the new leadership of Dr. Vishal Sikka.

Valuation & Recommendation – Retain ‘BUY’, revise TP to Rs4,040: We expect new strategic initiatives to be announced by Infosys under the new leadership of Dr. Vishal Sikka. However, in the near term, we see more tailwinds for margins to be played out in FY15. We see no downside risks to our estimates. We revise our target price to Rs4,040 (from: Rs 3,920), 17x FY16e earnings estimate.

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Key Financials (Rs m)

Y/e March FY12 FY13 FY14E FY15E FY16E

Revenue (Rs m) 337,340 403,520 501,330 538,365 606,727

Growth (%) 22.7 19.6 24.2 7.4 12.7

EBITDA (Rs m) 107,160 115,580 134,150 148,033 164,344

PAT (Rs m) 83,160 94,210 106,480 122,265 136,236

EPS (Rs) 145.4 164.7 186.2 213.7 238.2

Growth (%) 21.9 13.3 13.0 14.8 11.4

Net DPS (Rs) 40.7 54.6 54.9 64.9 69.9

Source: Company Data, PL Research

Profitability & valuation

Y/e March FY12 FY13 FY14E FY15E FY16E

EBITDA margin (%) 31.8 28.6 26.8 27.5 27.1

RoE (%) 27.4 25.7 24.4 23.6 22.4

RoCE (%) 27.2 25.6 24.3 23.5 22.3

EV / sales (x) 5.4 4.5 3.5 3.2 2.7

EV / EBITDA (x) 17.1 15.7 13.2 11.7 10.1

PER (x) 24.5 21.6 19.1 16.7 14.9

P / BV (x) 6.1 5.1 4.3 3.6 3.1

Net dividend yield (%) 1.1 1.5 1.5 1.8 2.0

Source: Company Data, PL Research

Stock Performance

(%) 1M 6M 12M

Absolute 9.5 (3.3) 19.5

Relative to Sensex 4.9 (32.9) (16.7)

LilladherPrabhudas Financials

Infosys

8/18/2014 22

Income Statement (Rs m)

Y/e March FY12 FY13 FY14E FY15E FY16E

Net Revenue 337,340 403,520 501,330 538,365 606,727

Direct Expenses 188,710 241,510 307,670 324,928 368,905

% of Net Sales 55.9 59.9 61.4 60.4 60.8

Employee Cost - - - - -

% of Net Sales 0.0 0.0 0.0 0.0 0.0

SG&A Expenses 41,470 46,430 59,510 65,404 73,478

% of Net Sales 12.3 11.5 11.9 12.1 12.1

Other Expenses - - - - -

% of Net Sales 0.0 0.0 0.0 0.0 0.0

EBITDA 107,160 115,580 134,150 148,033 164,344

Margin (%) 31.8 28.6 26.8 27.5 27.1

Depreciation 9,370 11,290 13,740 9,762 10,864

PBIT 97,790 104,290 120,410 138,271 153,480

Interest Expenses - - - - -

PBT 116,830 127,880 147,100 168,641 186,625

Total tax 33,670 33,670 40,620 46,376 50,389

Effective Tax rate (%) 28.8 26.3 27.6 27.5 27.0

PAT 83,160 94,210 106,480 122,265 136,236

Extraordinary Gain/(Loss) - - - - -

Adjusted PAT 83,160 94,210 106,480 122,265 136,236

Source: Company Data, PL Research

Balance Sheet (Rs m)

Y/e March FY12 FY13 FY14E FY15E FY16E

Share Capital 2,860 2,860 2,860 2,860 2,860

Reserves & Surplus 300,860 364,210 441,540 526,678 622,932

Shareholder's Fund 334,610 397,970 475,300 560,438 656,692

Preference Share Capital - - - - -

Total Debt - - - - -

Other Liabilities(net) 1,090 1,490 3,230 3,230 3,230

Deferred Tax Liability 120 1,190 640 640 640

Total Liabilities 335,820 400,650 479,170 564,308 660,562

Gross Block 90,300 106,760 134,120 156,193 181,069

Less: Depreciation 36,210 42,080 55,250 65,012 75,876

Net Block 54,090 64,680 78,870 91,181 105,193

Capital Work in Progress - - - - -

Cash & Cash Equivalent 209,680 235,710 292,210 335,124 403,612

Total Current Assets 298,690 335,740 397,480 472,036 562,062

Total Current Liabilities 47,660 62,860 91,380 93,109 100,893

Net Current Assets 251,030 272,880 306,100 378,927 461,169

Other Assets 26,930 45,700 61,490 61,490 61,490

Total Assets 335,820 400,650 479,170 564,308 660,562

Source: Company Data, PL Research

LilladherPrabhudas Disclaimer

8/18/2014 70

BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

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PL’s Recommendation Nomenclature

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