April 13, 2017 ICICI Securities Ltd | Retail Equity Research Result Update Tweaks margin band, Payout Policy… Infosys’ Q4FY17 performance was below our expectation on the operational front. US$ revenues grew 0.7% QoQ to $2,569 million, below 1.7% growth and $2,594.6 million estimate. Constant currency revenues were flat QoQ vs. our estimate of 2% QoQ Rupee revenues declined 0.9% QoQ to | 17,120 crore, below our 0.5% QoQ growth and | 17,358 crore estimate EBIT margins at 24.6% declined 50 bps QoQ and were below our estimate of 25.1% largely on account of slower revenue growth Reported PAT of | 3,603 crore was above our | 3,569.5 crore estimate led by lower tax expense The company announced a dividend of | 14.75 per share Guides for CC revenue guidance of 6.5-8.5% for FY18E… Infosys’ dollar revenues grew 0.7% sequentially to $2,569 million, below our 1.7% growth and $2,594.6 million estimate. Constant currency revenues were flat QoQ owing to weaker execution and drag in India geography revenues (declined 6.9% in CC terms) and retail, CPG & Lifesciences (declined 3.1% in CC terms). Going ahead, the management is optimistic about BFSI while retail and hi-tech could see some softness in the coming quarters. The company has guided for 6.5-8.5% CC revenue growth vs. our estimate of 7-9% citing a challenging demand environment and uncertain client spending among a few verticals. The revenue guidance implies growth of 2.1-2.9% QoQ over the next four quarters. Furthermore, the management remained optimistic about adoption of new offerings Skava, Mana, Panaya and Edge across verticals and cited that revenues from these offerings grew at ~20% YoY in FY17. Lowers EBIT margin band to 23-25% in FY18E… Infosys’ EBIT margins declined 50 bps QoQ to 24.6% in Q4FY17 below our expectation of 25.1%. Margins declined owing to rupee appreciation (35 bps impact), decline in realisation (65 bps impact) offset by cross currency tailwind and revenue hedges (50 bps) and operational efficiency. The management revised its targeted EBIT margin band downward to 23- 25% vs. 24-26% earlier due to rupee appreciation (70 bps impact), ramp up of onsite development centres in US to mitigate any visa concerns. Recast of capital allocation policy… The Board revised the capital allocation policy of the company after taking into consideration the strategic and operational cash requirements of Infosys in the medium term. The company plans to pay ~| 13,000 crore via dividend/share buyback to shareholders in FY18E. Additionally, effective from FY18E, Infosys revised its payout policy to 70% of free cash flow from ~50% of PAT earlier. The revised capital allocation policy seems to be a positive step in shareholder value creation. Maintain BUY with revised target price of | 1060… Though Infosys surprised negatively on the EBIT margin guidance front, we believe the current market price is already priced in. Currently, it is trading at attractive valuation of ~13.2x FY19 EPS & offers FY19 FCF yield of ~5%. Secondly, Infosys intends to return part of the cash and recast capital allocation policy that are steps in the right direction towards shareholder value creation. Hence, we maintain our BUY recommendation on the stock. We also roll over to FY19E and revise our target price to | 1060 (15x FY19E). Rating matrix Rating : Buy Target : | 1060 Target Period : 12 months Potential Upside : 14% What’s Changed? Target Changed from |1110 to |1060 EPS FY18E Changed from | 69.2 to | 64.6 EPS FY19E Introduced at | 70.7 Rating Unchanged Quarterly Performance Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%) Revenue 17,120 16,550 3.4 17,273 (0.9) EBIT 4,212 4,220 (0.2) 4,334 (2.8) EBIT (%) 24.6 25.5 -90 bps 25.1 -49 bps PAT 3,603 3,598 0.1 3,707 (2.8) Key Financials | Crore FY16 FY17E FY18E FY19E Net Sales 62,441 68,485 71,406 79,411 EBITDA 17,079 18,605 18,851 21,123 Net Profit 13,491 14,353 13,983 15,315 EPS (|) 59.0 62.8 64.6 70.7 Valuation summary FY16 FY17E FY18E FY19E P/E 15.8 14.8 14.4 13.1 Target P/E 18.0 16.9 16.4 15.0 EV / EBITDA 10.4 9.3 9.6 8.3 P/BV 3.4 3.1 3.2 2.9 RoNW (%) 21.8 20.8 22.3 21.7 RoCE (%) 30.2 28.8 31.0 30.5 Stock data Particular Amount Market Capitalization (| Crore) 212,553.7 Total Debt - Cash and Investments 32,697.0 EV (| Crore) 178,045.7 52 week H/L 1278 / 900 Equity capital 1,144.0 Face value | 5 Price performance (%) 1M 3M 6M 12M TCS (6.8) 3.9 1.1 (1.6) Infosys (6.4) (0.2) (4.3) (16.9) Wipro (0.1) 6.1 5.0 (8.9) HCL Tech (2.6) (0.8) 3.1 (0.2) Research Analysts Deepak Purswani, CFA [email protected]Deepti Tayal [email protected]Infosys (INFTEC) | 930
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April 13, 2017
ICICI Securities Ltd | Retail Equity Research
Result Update
Tweaks margin band, Payout Policy…
Infosys’ Q4FY17 performance was below our expectation on the
operational front. US$ revenues grew 0.7% QoQ to $2,569 million,
below 1.7% growth and $2,594.6 million estimate. Constant currency
Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Bloomberg, Company, ICICIdirect.com Research
Key events
Date Event
Sep-16 According to media, Infosys executive Vice President Sanjay Purohit resigned , making it the seventh key executive to quit since Vishal Sikka joined
Oct-16
Infosys launches blockchain pilot network for international remittances and trade finance with leading Indian private bank and with leading banking group in Middle
East, Emirates NBD
Nov-16
Infosys invested in US based start-up, TidalScale making it the 10th investment in a start-up from its $500 million innovation fund, though only 3rd investment in
CY16
Nov-16
Media article suggest Infosys has bagged a contract from Council of Europe.. As part of the contract Infosys would upgrade human resource management and
payroll system.
Nov-16 Infosys has made an investment of ~ 14.49 crore in UNSILO, a Danish artificial intelligence startup focussed on advanced text analysis
Nov-16 Infosys invests | 31.6 crore in Stellaris Venture Partners, an India based early stage venture fund.
Jan-17
Infosys General Counsel and Chief Compliance officer David Kennedy has quit the company marking the eighth high-profile resignation in Infosys in Vishal Sikka's
two-year reign.
Feb-17
According to media sources, Infosys is planning for buy-back worth | 12,000 crores approximately. Currently Infosys has liquid assets including cash and cash
equivalents and investments to the tune of | 35,697 crore as on December 31, 2016.
Feb-17
Infosys has changed norms for severance pay of its management team. Benchmarking has been done for severance pay according to each country and has
reworked the senior management contract to reflect it.
Mar-17 Infosys Finacle, part of EdgeVerve systems (subsidiary of Infosys) has been selected by Housing bank Algeria (Middle East) to power its bank operations.
Mar-17
Infosys shareholders have approved the proposal to adopt a new AoA, revision in compensation of COO & Whole-time Director U B Pravin Rao, and also appointment
of D N Prahlad as an Independent Director.
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern
Rank Name Latest Filing Date % O/S Position (m) Change (m)
1 Life Insurance Corporation of India 31-Dec-16 6.6% 151.7 3.4
ICICI Securities Ltd | Retail Equity Research Page 11
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