Pricing drop continues to hurt Infosys’ performance

Infosys' September quarter results were largely in line with our estimates, but materially below Street expectations. A significant fall in operating margins on account of pricing drop (second quarter in a row); a fall in revenue momentum in non-linear service offerings (products); and muted revenue growth in top customer lead us to believe that Infosys' revenue visibility still remains clouded.

We thus prefer stocks with better revenue visibility and, hence, recommend a switch to TCS or Tech Mahindra.

Revenues of $1,797 million (+2.6%q-o-q, in line with DBe) were ~70 bps below street estimates. While overall, volumes increased 6.1% q-o-q, blended pricing was down 3.4%q-o-q. The significant drop in pricing meant that operating margins (Ebit) were down 166bps q-o-q to 26.3%. The revenue miss is primarily on account of an 18%q-o-q decline in revenues from India business.

Product revenues (Finacle) were down 36%q-o-q. Other key negatives include lower lateral employee addition and a decline in clients contributing >$300 million. Infosys has retained its FY13E USD revenue (organic) growth guidance at 5%y-o-y and now forecasts an EPS of R160.6. This is in line with our estimates.

We note that the FY13E USD revenue growth guidance assumes a 3.7%CQGR over the next two quarters. This, in our view, appears to be a big ask, especially given the weak 1HFY13 performance. We continue to be worried about market share loss; dwindling growth in traditional services; and inferior positioning in growth market (Continental Europe).

Deutsche Bank

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