Infosys Technologies
Cluster: Evergreen
Recommendation: Buy
Price target: Rs2,430
Current market price: Rs2,183
Rupee appreciation spoils the party
Result highlights
- Infosys Technologies (Infosys) reported a revenue growth of 5.9% quarter on quarter (qoq) and 44.4% year on year (yoy) to Rs3,655 crore. The consolidated revenue in dollar terms has grown by 10.1% qoq but the appreciation of 3.8% in the rupee against the dollar limited the growth of the revenues in rupee terms.
- The sequential improvement of 60 basis points in the operating profit margin (OPM) to 32.7% is commendable, given the adverse impact of the rupee appreciation (of around 200 basis points) during the quarter. The improvement in the OPM was driven by a 1.4% improvement in the blended billing rates, a 40-basis-point saving in the selling, general and administration (SG&A) cost, a favourable shift towards higher proportion of offshore revenue (offshore contribution increased by 90 basis points) and a steep growth of 27.5% qoq in the high-margin banking product business.
- The company has also done an appreciable job of limiting the foreign exchange (forex) fluctuation losses on the open forward contracts to just Rs20 crore, which gets reflected in the other income component. Consequently, the other income of Rs59 crore declined only 10.6% qoq and was higher than market expectations.
- The earnings growth of 5.8% qoq and 51.5% yoy to Rs983 crore is in line with our estimates and consensus market expectations. However, the company has failed to comprehensively surpass the street expectations this time.
- What's more, the guidance for Q4 is quite muted. The revenue and earnings are guided to grow by 3.7-3.9% and 1.4% qoq respectively, which has resulted in a mere 1% upward revision in the annual guidance. This essentially means that the consensus earnings estimates already imply a reasonably stiff sequential growth of over 13.5-14% in Q4 and are likely to result in the pruning down of the earnings estimates by some analysts (in comparison with an across-the-board upward revision of earnings estimates by analysts in the previous two quarters). We are also revising down our FY2007 revenue estimates by 0.4% and earning estimates by 0.65% to factor in the impact of the rupee appreciation.
- At the current market price the stock trades at 32.2x FY2007 and 24.2x FY2008 estimated earnings. Though the stock could underperform the broader market in the short term, we continue to remain bullish on it with a one-year perspective and maintain our Buy call with a price target of Rs2,430.
MUTUAL FUNDS: WHAT'S IN—WHAT'S OUT
Fund Analysis: January 2007
An analysis has been undertaken on equity and mid-cap funds' portfolios, indicating the favourite picks of fund managers for the month of December 2006. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 17 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc.
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