Infosys (FY2010 guidance raised)

STOCK UPDATE

Infosys Technologies

Recommendation: Hold
Price target: Rs2,505
Current market price: Rs2,178

FY2010 guidance raised, currency swings remain a concern

Result highlights

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      Even though Infosys Technologies (Infosys)? Q2FY2010 results were marginally below our expectations, the positive tone from the management about the demand environment and the upward revision in its FY2010 guidance were the key positive takeaways from the Q2FY2010 results. Though we remain fundamentally positive on the stock, sharp currency swings would remain a strong head wind for the stock in the near term and we would look to enter the stock at a lower level.
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      The consolidated revenues grew by 2.1% sequentially to Rs5,585 crore in Q2FY2010. The dollar term revenues grew by 2.9% sequentially to USD1,154 million and were higher than its guidance of USD1,110-1,130 million. In constant currency, the revenues grew by 1.2% sequentially driven by the volume growth (up 2.3%, in line with our expectation). The realisation (in constant currency) declined by 1.1% sequentially, which was largely due to the renegotiation of contracts in the previous quarter.
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      The operating profit margin (OPM) improved by 50 basis points sequentially to 34.6% during the quarter. The improvement in the OPM was on account of a favourable revenue mix (higher offshore revenues), improved utilisation and favourable cross-currency movement that were partially offset by increased investment in the selling and marketing expenses.
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      The net income grew by 0.8% sequentially to Rs1,540 crore in Q2FY2010 and was marginally below our expectation of Rs1,606 crore. The results came below our expectation due to a lower than expected other income (Rs236 crore vs our expectation of Rs294 crore).
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      In terms of the guidance for Q3FY2010, the dollar term revenues are guided to grow by 0.3% to 1%, which is largely in line with the street?s expectation. The earnings per share (EPS) are expected to decline by 12.5-13.5% sequentially to Rs23.35-23.56. The sharp decline in the earnings is expected on account of a wage hike review. The company has considered a wage hike (India?8%, outside India?2%), which is likely to have a negative impact on the margin in the next quarter.
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      For the FY2010 guidance, the dollar term revenue growth guidance has been revised upward to ?1% to
      ?1.3% from ?3.1% to ?4.6% guided earlier. The same implies that the dollar term revenues are expected to grow at a compounded quarterly growth rate (CQGR) of 1% over the next two quarters.
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      In terms of the FY2010 earnings guidance, it has been revised to Rs99.6 to Rs100 per share from Rs94.6 to Rs96 per share guided earlier. Though it has revised its earnings guidance upward, we still see scope for outperformance in the FY2010 EPS guidance on the back of a better performance in H1FY2010 and an improvement in the business environment.
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      In terms of the demand environment, the management tone has turned cautiously optimistic. The management has seen stability in demand and client decision-making cycle has improved, especially in the area of mergers and acquisitions. Apart from an improvement in the banking, financial services and insurance (BFSI) vertical, the company is also witnessing better traction in energy, utilities and retail verticals. In terms of pricing, contract re-negotiation is over and the company has seen stability in pricing.
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      We have fine-tuned marginally our earnings estimates to incorporate the Q2FY2010 results, the improvement in the business environment and the wage hike review into our estimates. Though we remain fundamentally positive on Infosys (and on the information technology [IT] sector), the sharp currency swings in the recent past are likely to remain strong headwind for the IT stocks. Hence, we would like to wait to enter the stock at a lower level. We maintain our Hold recommendation on the stock with a price target of Rs2,505. At the current market price, the stock is trading at 20.9x FY2010 earnings estimates and 19.1x FY2011 earnings estimates.

VIEWPOINT

Jain Irrigation Systems

MIS to drive growth
Jain Irrigation Systems Ltd (JISL) is a leading agri-business company, operating in diverse but integrated segments of the agri-business value chain. The company is the second largest micro-irrigation company globally and is the largest manufacturer of irrigation systems in India (commanding a 55% market share in drip irrigation and a 35% market share in sprinkler irrigation). This business contributes above 50% to the company?s top line and we expect the contribution to rise in the coming years on account of the extensive support of the government to the Micro Irrigation System (MIS).

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