Beats 1QFy10 by a significant margin reinforcing our positive thesis; Guidance remains conservative; Remain positive
• Infosys reported good 1QFY10 results beating consensus and our estimates by a good margin. Revenues at Rs 54.7 billion, were down 3% Q/Q but 3% ahead of consensus. EBITDA margins jumped 50 bps Q/Q against expectations of 200 bps+ decline leading to EBITDA beat of 11% and EPS at Rs 26.7/share was 12% ahead of consensus. British Telecom (BT, largest client) continues to decline with top client US$ revenues down 20% Q/Q, volumes would have grown ex-BT in our view. With BT now contributing <5%> BT going forward.
• It is noteworthy that both volumes and pricing were better than expected - volumes were down just 1% Q/Q and reported US$ pricing was up 1% Q/Q (we believe constant currency prices were down ~1% Q/Q, ahead of consensus and indicating that price declines are largely behind us). Other Metrics were largely stable with a slight decline of ~945 people in the quarter, attrition flat, utilization down 1% Q/Q and industry segments largely inline.
• US$ FY10 guidance was kept unchanged (though lower end was moved up) but Rupee revenue/EPS guidance was lowered by 1%/5% driven by currency moves. It is interesting to note that guidance implies flat US$/Rupee revenues for the remaining 3 quarters of FY10. On EPS,
guidance implies down 10% for 2QFY10 followed by 4%/4% decline in 3Q/4QFY10. New FY10 EPS guidance is Rs 94.6-96.0.
• Implications: Infosys 1QFY10 performance reinforces our thesis that worst is behind us and business for offshore players is stabilizing. We expect similar performances from other large Indian IT players. Further, we believe that Infosys FY10 guidance is highly conservative largely due to tough macro environment and first ever guidance downgrade in FY09.
• Investment view: We remain positive on the sector and Infosys and expect significant consensus upgrades as business accelerated in 2H2009. We keep our FY10E EPS 10%+ above guidance and would advise investors to be Overweight the sector on a 6-9 month view.
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