India Equity Institutional Research I Information Technology Result Update

Infosys Ltd. Rs. 3,550

Size of large deals win needs to increase significantly inorder to catch

up peers in FY15E
HOLD
Key Result Highlights
Revenue growth in Q3 FY14 and increase in guidance for FY14 in-line Target Price (Rs): 3,650
with expectation; positive surprise at margin front: - Revenue growth of
1.2% QoQ (in constant currency) in Q3 FY14 was more or less in line with our Potential Upside : 3%
expectation. Moreover the company has upped FY14E revenue growth guidance
Previous TP (Rs): 3,513
to 11.5%-12% YoY in USD terms; as we indicated in our preview numbers.
However, increase in both offshore and onsite billing rate by 2.2% QoQ in Q3
FY14 came as positive surprise; especially considering the fact that the Market Data
company has registered pressure in billing rates in case of large outsourcing Shares outs (Cr) 57.4
deals. Ergo improvement in billing rate led increase in EBITDA margin by 165 Equity Cap (Rs. Cr) 287.0
bps QoQ versus expectation of expansion in margin by 69 bps QoQ.
Mkt Cap (Rs. Cr) 203,790
Size of large deals win needs to increase significantly inorder to catch 52 Wk H/L (Rs.) 3,581/2,190
up with peers in FY15E: -The company has signed large deals worth total Avg Vol (1yr avg) 1,075,275
contract value (TCV) of $500 mn in Business IT Services (constituting 61% of Face Value (Rs.) 5
total revenue) in Q3FY14; taking total large deals signing in 9MFY14 to $1.5 bn.
Bloomberg Code INFO IN
As per the management, in 1st year of deal signing ~8% of revenue is realized;
whereas in subsequent years ~20% revenue is realized from the deal. Taking
the same into account; large deals signed in FY14 will contribute ~5% (12% of Market Info:
$2 bn amounting to $240 mn) to Business IT Services revenue growth in FY15E. SENSEX 20,759
Assuming the current large deals TCV win rate continues in FY15E i.e. $2 bn
NIFTY 6,171
p.a.; it will contribute additional ~3% (8% of $2 bn amounting to $160 mn)
incremental revenue in FY15E; whereas ramp up of small deals from existing as
well as new clients may contribute another $200mn to revenue in FY15E taking Price Performance
160
total revenue growth of Business IT Services to 12% YoY.
150
Hence, size of large deal wins needs to increase significantly inorder to grow in- 140
line with industry growth rate in FY15E. For instance; increase in large deals 130
TCV win from current annualized rate of $2 bn to $3 bn in FY15E will contribute 120
additional ~1.5% (8% of $1 bn) revenue growth in FY15E. 110
100
90
(in $ mn)

Sep-13

Nov-13
Jan-13

Jul-13

Jan-14
Mar-13

May-13
Revenue from Business IT Services on TTM basis 4,938
Incremental Business IT revenue in FY15E assuming 15% growth 741
Infosys Sensex
TCV of large deals signed in Business IT Services in FY14 2000
Incremental revenue in FY15E from large deals signed in FY14 Share Holding pattern (%)
(only 12% of TCV considered as 8% is already realized in 1st year) 240 Particular Sep-13 Jun-13 % chg

Management expects EBIT margin to be ~25% in medium term: - The Promoter 16.0 16.0 0.0
management sounds confident of maintaining EBIT margin at current level i.e. FII 39.9 39.6 0.3
~25% in medium term; inspite pressure of wage hike which they are planning
DII 16.1 18.3 -2.2
to announce in the beginning of April 2014. Key margin levers at the company
disposal are widening of employees pyramid base, further increase in offshore Others 28.0 26.1 1.9
revenue mix and rationalization of general & administration expenses. Total 100 100

Valuation and view Analysts :

We believe there is limited scope for upgrade in consensus earnings estimates for
FY15E unless the large deals TCV signed in next couple of quarter increases Hardik R. Shah
significantly. Until then we recommend HOLD on the stock with a price target of Hardk.r.shah@krchoksey.com
Rs.3,650 by assigning multiple of 17 times (15% discount to TCS target P/E multiple 91-22-6696 5526
considering differential in revenue growth rate atleast in near term) to its FY15E EPS
of Rs.214.7.

Exhibit 1: Key Financials (Rs. Crore)

Particulars FY12 FY13 FY14E FY15E
Revenue 33,734 40,352 50,573 58,621
EBITDA Margin (%) 31.8% 28.6% 27.4% 27.4%
Net profit Margin (%) 24.7% 23.3% 21.5% 20.9%
EV/EBITDA (x) 17.0 15.5 12.7 10.6 www.krchoksey.com
EPS (In INR) 145.5 164.8 190.0 214.7
91-22-6696 5555
P/E (x) 24.4 21.5 18.7 16.5
Source: Company data, KRChoksey Research 91-22-6691 9569

KRChoksey Institutional Research is also available on Bloomberg KRCS<GO>, Thomson Reuters, Factset and Capital IQ 13th January, 2014
Infosys Ltd.

Trend in Consolidated IT Services billing rate

Offshore billing rate (person/Month) % chg QoQ Onsite billing rate (person/Month) % chg QoQ

4,600 4,552 4,555 5% 13,200 13,101 5%

4,485 12,944
4,458 3% 13,000
3%

In USD
12,818
In USD

4,383
4,400 2% 1% 4%
2% 12,800 12,707
2% 12,639 2% 1%
-1% 1%
12,600
4,200 -1% -3% -2% -1%
-2% 12,400 -1%
-5%
12,200 -3%
4,000 -7%

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14
Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14
The improvement in billing rate for the second consecutive quarter came as positive surprise especially
considering the fact that competition is stiff in case of large outsourcing deals. Moreover, on positive note the
management has not witnessed any pricing renegotiation with clients on account of recent dip in INR against the
major global currencies.

Revenue Spread: Industry-wise

In Q3 FY14 (YoY) In Q3 FY14 (QoQ) % share in incremental revenue (YoY) % share in revenue
34%
35% 31%
Incremental Revenue (USD

27%
75 64
59 25% 23%
16%
16%
45 14% 11%
30 15%
27 21 6%
mn)

11 12 9 6 8% 7% 6%
15 2 4 2%
0
6 5% 3%5%
0%
-15 1 6 -14 0%
-5%
Trans.
Insur.

Telecom
Retail
Mfg.

Others
BFS

Healthcare
Energy Util.

Trans.
Insur.

Telecom
Retail
Mfg.

Others
BFS

Healthcare
Energy Util.
The company registered pressure in Manufacturing on account of seasonality; whereas dip in revenue from
Telecom is more on account of structural issues especially in wire-line segment. The company expects traction
across industries in FY15E except telecom.

Revenue Spread: Service line-wise

In Q3 FY14 (YoY) In Q3 FY14 (QoQ) % share in incremental revenue (YoY) % share in revenue
100 50%
78 41%
Incremental Revenue

80
40% 33%
60
(USD mn)

32 30%
40 22 17% 19%
21 13 13 20% 12%
20 104 9 5 3 16%
3 9 6 1 11% 9% 4%
0 10% 7% 7%
5%6% 3%3% 3% 3%
1 3 0%
-20 4 0%
Package
App. Dev.

BPO
Products

Others
Package

Testing

PES
IMS
BPO
App. Dev.

Products
App Main.

Others
PES

Testing
IMS

App Main.

We believe, the company is bit late in concentrating on large deals renewal market; where peer sets such as HCL
Tech and TCS has already established strong presence. And hence strategy to rejuvenate commoditized service
lines such as IMS, Application Maintenance and BPO continues to register lackluster growth rate.

2 KRChoksey - Institutional Research

Infosys Ltd.

Revenue Spread: Geography-wise

In Q3 FY14 (YoY) In Q3 FY14 (QoQ) % share in incremental revenue (YoY) % share in revenue
100
94
Incremental Revenue (USD mn)

61%
80 60%
50%
64
60
40% 34%
40
27 24%
20 13 18 13
5 20%
9% 13%
0 7%
2%
-20 11 0%
USA Europe India ROW USA Europe India ROW

Dip in revenue from US by 0.8% QoQ in CC terms came as negative surprise; especially considering the
commentaries of peer sets about pick-up in discretionary spend in US on back of improvement in macro
environment. We believe the recent exit of key personnel heading US geography or segments within US for
instance Ashok Vemuri (Head- America); Shaji Farooq (head Financial Services - America) and Sudhir Chaturvedi
(successor of Shaji and headed Financial Services - America) led to pressure in American geography and hence
we like to see pick up in momentum in US before turning further positive on the stock.

Utilization rate continues to improve Attrition rate continues to be above comfort level
24%
25%
79% 78% 78% 23%
23%
77% 76% 21%
74% 74% 20%
75% 74% 21%
73%
72%
73% 19%
71%
70% 17%
71%
17%
69%
67% 15%
Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14
Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14
Attrition rate (in %)
Incl. Trainees Excl Trainees

The companys focus on improving margins by
streamlining operations is evident from improvement in
utilization rate by 400 bps over the span of last 4
quarters.
Quarterly annualized attrition rate continues to be
above our comfortable level. We believe unless the
company reins in high attrition rate; the recent
measures undertaken by the company to improve
employees productivity would not fructify.

Exhibit 2: Change in Estimates

Particulars FY14E FY15E

Old New Old New
Net Revenue (USD in mn) 8,316 8,304 9,472 9,451
Avg. Exchange rate (INR/USD) 60.9 60.9 62.0 62.0
Net Revenue (Rs. in crore) 50,638 50,573 58,726 58,621
EBITDA 13,547 13,835 16,251 16,072
Net Profit 10,715 10,860 12,725 12,273
EPS 187.5 190.0 222.7 214.7
Source: KRChoksey Research

3 KRChoksey - Institutional Research

Infosys Ltd.

Exhibit 3: Q3 FY14: Result Key Financials (Rs. Crore)

Particulars Q3FY14 Q2FY14 Q3FY13 Q-o-Q Y-o-Y
Net Revenue (USD in mn) 2,100 2,066 1,911 1.6% 9.9%
Avg. Exchange rate (INR/USD) 62.0 62.8 54.5 -1.2% 13.7%
Net Revenue (Rs. in crore) 13,026 12,965 10,424 0.5% 25.0%
Total operating expenses 9,406 9,576 7,454 -1.8% 26.2%
EBITDA 3,620 3,389 2,970 6.8% 21.9%
EBITDA Margin (%) 27.8% 26.1% 28.5% 165 bps -70 bps
Depreciation 361 333 293 8.4% 23.2%
EBIT 3,259 3,056 2,677 6.6% 21.7%
Other income 731 510 503 43.3% 45.3%
Profit before tax 3,990 3,566 3,180 11.9% 25.5%
Tax 1,115 940 811 18.6% 37.5%
Net Profit 2,875 2,626 2,369 9.5% 21.4%
Net Profit Margin (%) 22.1% 20.3% 22.7% 182 bps -66 bps
EPS (In Rs.) 50.3 45.9 41.5 9.5% 21.4%
Source: Company data, KRChoksey Research. Note- EBITDA and PAT of Q2 FY14 are after excluding onetime visa settlement cost of Rs.219 crore

Exhibit 4: Profit and Loss Statement (Rs. Crore)

Particulars FY12 FY13 FY14E FY15E
Net Revenue (in USD mn) 6,994 7,398 8,304 9,451
Average exchange rate (INR/USD) 48.2 54.5 60.9 62.0
Net Revenue (Rs. in crore) 33,734 40,352 50,573 58,621
Total operating expenses 23,018 28,794 36,738 42,549
EBITDA 10,716 11,558 13,835 16,072
EBITDA Margin (%) 31.8% 28.6% 27.4% 27.4%
Depreciation 937 1,129 1,384 1,700
EBIT 9,779 10,429 12,451 14,372
EBIT Margin (%) 29.0% 25.8% 24.6% 24.5%
Forex Gain/ (loss) 52 258 47 0
Other income / Incl Forex gain/loss 1,852 2,101 2,389 2,674
Profit before tax 11,683 12,788 14,887 17,045
Tax 3,367 3,367 4,026 4,773
Net Profit 8,316 9,421 10,860 12,273
Net Profit Margin (%) 24.7% 23.3% 21.5% 20.9%
EPS (In Rs.) 145.5 164.8 190.0 214.7
Source: Company data, KRChoksey Research

Exhibit 5: Balance Sheet (Rs. Crore)

Particulars FY12 FY13 FY14E FY15E
SOURCES OF FUNDS
Share capital 286 286 287 287
Add:- Reserves and surplus 33,175 39,511 46,570 54,547
Shareholders' fund 33,461 39,797 46,857 54,834
TOTAL SOURCES OF FUNDS 33,461 39,797 46,857 54,834
APPLICATION OF FUNDS
Gross block 10,196.0 13,020.0 15,804.2 19,540.2
Less: -Accumulated depreciation 3,621.0 4,208.0 5,592.2 7,292.2
Net block 6,575 8,812 10,212 12,248
Deferred tax assets 304 384 384 384
Net current assets 5,602 6,636 8,340 9,681
Cash & cash equivalent 20,980 23,965 27,922 32,522
TOTAL APPLICATION OF FUNDS 33,461 39,797 46,857 54,834
Source: Company data, KRChoksey Research

4 KRChoksey - Institutional Research

Infosys Ltd.

Exhibit 6: Cashflow Statement (Rs. Crore)

Particulars FY12 FY13 FY14E FY15E
Profit before taxes 11,683 12,788 14,887 17,045
Operating Profit before working capital changes 10,782 13,745 13,882 18,107
Net cash provided by operating activities 6,378 9,478 8,153 11,993
Net cash used in investing activities (227) (5,051) (396) (3,098)
Net cash used in financing activities (2,321) (3,211) (3,800) (4,295)
Net increase in cash and cash equivalents 3,830 1,216 3,957 4,600
Cash and cash equivalents at beginning of the year 16,761 20,616 21,832 25,789
Cash and cash equivalents at end of the year 20,591 21,832 25,789 30,389
Source: Company data, KRChoksey Research

Exhibit 7: Ratios
Particulars FY12 FY13 FY14E FY15E
Margin Ratios
EBITDA Margin (%) 31.8% 28.6% 27.4% 27.4%
Net profit Margin (%) 24.7% 23.3% 21.5% 20.9%
Growth Ratios
Revenue growth (%) 22.7% 19.6% 25.3% 15.9%
EBITDA growth (%) 19.5% 7.9% 19.7% 16.2%
Net Profit growth (%) 21.9% 13.3% 15.3% 13.0%
Valuation Ratios
B.V. (In Rs.) 582.8 693.1 816.1 955.1
P/B (x) 6.1 5.1 4.3 3.7
ROE (%) 24.9% 23.7% 23.2% 22.4%
EV/EBITDA (x) 17.0 15.5 12.7 10.6
EPS (In INR) 145.5 164.8 190.0 214.7
P/E (x) 24.4 21.5 18.7 16.5
Source: Company data, KRChoksey Research

5 KRChoksey - Institutional Research

Infosys Ltd.

Rajiv Choksey Director rajiv.choksey@krchoksey.com +91-22-6696 5555

Head-Institutional
Anuj Choksey anuj.choksey@krchoksey.com +91-22-6696 5500
Equities

Infosys Ltd.

CMP (Rs) TP (Rs) Recommendation Rating Legend

13-Jan-14 3,550 3,650 HOLD
11-Oct-13 3,274 3,513 ACCUMULATE
8-Oct-13 3,037 3,306 ACCUMULATE Our Rating Upside
13-July-13 2,804 2,884 HOLD
8-July-13 2,461 2,635 ACCUMULATE
Buy More than 15%
15-Apr-13 2,245 2,349 HOLD
9-Apr-13 2,883 2,950 HOLD
12-Jan-13 2,699 2,875 ACCUMULATE
Accumulate 5% - 15%
8-Jan-13 2,375 2,551 ACCUMULATE
15-Oct-12 2,396 2,352 REDUCE
8-Oct-12 2,575 2,490 REDUCE Hold 0 5%
13-July-12 2,264 2,277 HOLD
13-Apr-12 2,402 2,474 HOLD
12-Jan-12 2,588 2,781 HOLD Reduce -5% 0
13-Oct-11 2,679 2,803 HOLD
12-Jul-11 2,768 3,302 BUY
17-May-11 2,850 3,358 BUY Sell Less than -5%
15-Apr-11 2,989 3,156 HOLD

Disclaimer:
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be reliable, investors are advised to satisfy themselves before making any investments. Kisan Ratilal Choksey
Shares & Sec Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the
reports and consequently, is not liable for any decisions taken based on the same. Further, KRC Research Reports
only provide information updates and analysis. All opinion for buying and selling are available to investors when
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Ratilal Choksey Shares & Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein
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Please send your feedback to research.insti@krchoksey.com

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Registered Office:
1102, Stock Exchange Tower, Dalal Street, Fort, Mumbai 400 001.
Phone: 91-22-6633 5000; Fax: 91-22-6633 8060.

Corporate Office:
ABHISHEK, 5th Floor, Link Road, Andheri (W), Mumbai 400 053.
Phone: 91-22-6696 5555; Fax: 91-22-6691 9576.

6 KRChoksey - Institutional Research