Infosys recorded a 6.8% q-o-q and 35.5% y-o-y growth in topline for 3QFY2009.
However, as per International Financial Reporting Standards (IFRS), sequential revenues in dollar terms actually witnessed de-growth of 3.7%, while in constant currency terms, the company managed to record a 1% q-o-q growth.
The significantly higher Rupee growth rate was on account of the higher Rupee-Dollar exchange rate during the quarter (10.9% q-o-q and 25.4% y-o-y).
This was offset to an extent by cross-currency headwinds, with the US Dollar appreciating sequentially against the Australian Dollar, Euro and British Pound by 32%, 14% and 17% (quarterly average) respectively.
During 3QFY2009, Infosys recorded an impressive 199bp q-o-q rise in EBITDA margins on account of the significantly weaker Rupee, lower SG&A costs and a higher proportion of offshore revenues.
Clearly, given the worsening business environment with revenue visibility becoming poorer, the company has managed to maintain a tight leash on its operating costs, with SG&A costs falling as a percentage of sales by 178bp q-o-q.
Infosys recorded a 14.6% q-o-q growth in its 3QFY2009 bottomline in 3QFY2009, primarily on account of the impressive margin performance.
However, this includes a tax write-back of Rs62 crore and an “inducement fee” of Rs17 crore booked in Other Income received on account of the Axon deal. Excluding these items, bottomline grew by 9.1% q-o-q.
There has been no improvement whatsoever in the global economic environment over the past few quarters, rather the outlook has worsened considerably as the slowdown spreads to encompass all sectors of the economy.
Revenue visibility has thus become hazier than ever. With the US economy undergoing a structural re-alignment and likely to undergo an extended period of painful transition, any recovery is likely to take some while.
Further, the contagion is spreading across the globe and economies like Europe are also feeling the pinch in no small manner. As a result, the near-term outlook for the Indian IT Sector remains cautious and uncertain.
We expect the company to record a CAGR growth of 18.3% in topline over FY2008-10E, while bottomline is estimated to grow at a CAGR of 16.3% over the same period.
EBITDA margins are expected to expand in FY2009 and stay in a range in FY2010, given the strong operational performance recorded by the company.
We have cut our volume and pricing estimates for FY2010 and now estimate CAGR volume growth of around 12% over FY2008-10E, as against our earlier estimate of around 14% CAGR.
Volume growth is likely to come down to single digits in FY2010 with a cut of 2% in pricing. Thus, while EPS is likely to grow by 26.5% in FY2009, we estimate single digit growth of 6.9% in FY2010.
We have also downgraded the P/E multiple for the stock to 12x (15x earlier), considering the lower growth trajectory of the company.
At Rs1,230, the stock is trading at 11.2x FY2010E EPS. We concur with the fact that considering the current environment and the near-term bleak outlook for software companies, upsides in the stock price will be capped in the near-term.
Nonetheless, we believe companies like Infosys, which set the standards for corporate governance in the country and are relatively the best geared to capitalize on any recovery in the sector fortunes, are likely to get a premium over other firms in the sector.
Thus we stick with the stock as our sector top pick. However, in wake of the recent out-performance of the stock, which has risen 10% in the current month vis-à-vis the Sensex, which has lost 6%, we recommend an ACCUMULATE on the stock.