Why is Emkay bullish on Infosys ahead of Q3 results

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Why is Emkay bullish on Infosys ahead of Q3 results

Emkay Global Financial Services has come out with its report on IT Services. The research firm recommends to accumlate Infosys and hold Tata Consultancy Services (TCS) and HCL Technologies.

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Emkay Global Financial Services has come out with its report on IT Services. The research firm recommends to accumlate Infosys and hold Tata Consultancy Services (TCS) and HCL Technologies .

"IT Services, we lower our US$ revenue estimates marginally driven by adverse cross currency movements, our FY12-13E earnings are upped by ~0-6% for our Tier I coverage universe driven by our economist's revised currency assumptions of Rs 49.5/$ for FY13 ( V/s Rs 48/$ earlier). We highlight that we do not build in full flowthrough of currency led gains into our margins and earnings estimates. TCS does not see the benefit of lower currency assumptions for FY12 given significant amount of hedges, Infosys, Wipro and HCL Tech see FY12E earnings getting upgraded by 4%, 2% and 5% each. For FY13, earnings raises are similar for Infosys, TCS and HCL Tech by ~4-5% with Wipro's earnings getting upgraded by 3.4%.We would be incorporating revised currency assumptions for our Tier II coverage universe shortly in a separate note. Although our ratings on the stocks remain unchanged for now, a raise in FY12-13E earnings drives a 4-5% raise in our TP's for the companies. While we retain accumlate on Infy (TP revised to Rs 2,900 V/s Rs 2,800 earlier), we retain HOLD on TCS (TP raised to Rs 1,110 V/s Rs 1,060 earlier) and HCL Tech (TP Rs 430 V/s Rs 415 earlier). Wipro remains the least preferred stock in our Tier I coverage as we continue to see challenges to co's turnaround and catch up to peers despite the optimism within sections of the street. We would watch out for Dec'11 qtr performance from Wipro before taking any constructive call on the company."

"In the recent months, investors have been worried given Infosys's cautious comments on demand which could impact co's Dec'11 qtr performance as well and this remains juxtaposed against a relatively more positive outlook from peers like TCS, Cognizant and global major Accenture. While we expect Dec'11 qtr to be in line with investor /street expectations we would watch out Dec'11 results/commentary for (1) decision making on CY12 budgets ( note that decision making on spends is more important to growth prospects for Indian IT rather than a clear increase/decrease in overall spending), (2) hiring during the quarter (both lateral and campus offer figures would be important as they would be a leading indicator of how companies are preparing themselves for client spends over the next few quarters and (3) pricing outlook (some peers have talked about passing currency led gains to clients to increase market share)."

"Our selective preference within the sector continues with Infosys the lone Accumulate rated stock within our Tier I coverage while we continue to like MindTree and Hexaware in our mid tier coverage given improving operational performance aided further by the recent currency depreciation. We believe that Dec'11 qtr results from these companies will further lend proof to our positive thesis on the companies over the past few quarters. Recent correction in Hexaware's stock price in our view provides investors with a attractive entry point for ~ 5.5% dividend yield and ~8.5xCY12 P/E," says Emkay Global Financial Services research report.

Non-Institutions holding more than 90% in Indian cos

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To read the full report click on the attachment