The following is the Stock Analyst Note on Infosys, Ltd, published by Morningstar Analyst Swami Shanmugasundaram, following the firm's fourth-quarter earnings. Registered Morningstar Members gain exclusive access to our full Infosys Analyst Report, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Registered member? Get these reports immediately when you sign up with Morningstar for free.
Infosys started its fiscal 2013 last April on a dismal note and ended it in the same fashion. For the second consecutive year, Infosys offered subpar revenue guidance (6%-10% growth) that trails the industry forecast (12%-14% growth) by a wide margin.
Additionally, no earnings guidance from the firm for the first time in its history has raised questions about its execution strategy (pricing in particular) in the near future. It very much looks like Infosys is more than willing to compromise on its operating margins to drive top-line growth.
While we are slightly concerned about its extended struggles, we continue to believe in the company's long-term potential, given its entrenched client base and wide portfolio of offerings. Accordingly, we plan to maintain our fair value estimate and narrow moat rating.
We don’t think Infosys' recent string of lackluster results could solely be blamed on its rigid premium pricing stand. We think the company also suffered from an uncertain demand environment and decline in discretionary spending.
Over the past few years, Infosys' revenue mix has been skewed more toward discretionary projects. The firm derives more than one third of its revenue from consulting and package implementation, while most of its better-performing offshore peers generate less than one fifth of their revenue from these sources.
Accenture's weak results in its consulting practice over the past few quarters offer strong evidence that all is not well in discretionary IT consulting.
Infosys' fiscal 2013 revenue totaled $7.4 billion, up 5.7% from last year. During the year, volume rose 8.8%, partially offset by a 3% decline in productivity.
While we expected to see productivity decline (as the firm softened its stance on pricing), we were surprised by the magnitude. This clearly shows that Infosys was more aggressive on pricing. This was also evident from the 300-basis-point decrease in operating margins during the year, to 25.8% from 28.8% last year.
We expect Infosys' margin to be under pressure in the near term, but don't expect to see another significant drop like this in the future. We believe the company could certainly improve upon its utilization rates to protect its margins.