After an ordinary Q3 FY07, Infosys delivers a below ordinary performance in Q4 FY07 missing its revenue guidance for the quarter, believe it or not. As if this was not enough, the operating margin declined qoq by 100 bps mainly impacted by the Rupee appreciation. If not for the exceptional reversal in tax provisions amounting Rs1250mn, the net profit would have grown just 3.7% qoq. The sequential EPS growth was further depressed by exercise of majority of outstanding options at the start of the quarter. Company has guided for a muted Q1 FY08 (in line with traditional pattern) and below expected FY08 revenue and EPS growth.

Outlook

In the light of poor Q4 FY07 result and below expected FY08 guidance, we are revising our FY08 EPS estimate downwards by 4% from Rs87.1 to Rs83.6. However, we maintain BUY on the company as our 1-year target price of Rs2,509 (based on 30x FY08E EPS) indicates 19.5% upside from present levels. The stock returns remain attractive even post the EPS downgrade due to significant price fall in the last 3 months (~12%) especially since the Budget (~9%).

Click below for the detailed Result Update:
http://www.indiainfoline.com/content/rep/Result_Analysis/2007/4/1642007/infosystch_0307.pdf

Warm Regards,

Rajiv Mehta
India Infoline Ltd.