Buy Infosys; target Rs 3450: Arihant capital markets

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Buy Infosys; target Rs 3450: Arihant capital markets

Arihant capital markets is bullish on Infosys and has recommended buy rating on the stock with a target price of Rs 3450 in its January 12, 2012 research report.

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Arihant capital markets is bullish on Infosys and has recommended buy rating on the stock with a target price of Rs 3450 in its January 12, 2012 research report.

"Infosys posted their Q3FY12 results which were slightly above our expectation in INR terms but slightly lower in USD terms. Infosys' topline saw a robust growth of 14.8% QoQ to Rs.9298cr while its bottomline went up by a whopping 24.5% to Rs.2372cr in INR. In US$ terms, revenues were up by 3.4% at $1806mn. Margins saw a sharp improvement of 266 bps and 198 bps at EBIDTA and PAT levels respectively. The improvement in revenue and margin were both driven mainly by rupee depreciation of ~10% in Q3. Volume growth was however modest at 3.1% (4.5% in Q2FY12) which is partly due to seasonality as the December quarter has lesser number of working days. Its utilisation rate however remained flat at 76.3% (excluding trainees) against our expectation of slight improvement in it. Thus, a favourable currency movement helped Infy to post an EPS of Rs.41.5 per share (Rs.33.4 per share for Q2FY12) which was better than their own guidance of Rs.38.5-39.2 for Q3."

"The major dampener came in the form of scaling down of their US dollar guidance for the second consecutive time to 16.4% vis-à-vis 17.1-19.1% given in Q2 (the original guidance was 18-20% YoY US$ growth given at the beginning of FY12). The management continued with their cautious commentary and indicated that slower growth in the developed market could hurt the industry's demand. Though, no project cancellation has been witnessed so far, however, clients seems to be procrastinating the start of new larger projects. The flat Q4FY12 dollar guidance at $1806- 1810 mn is a big negative as the March quarter has higher number of working days than the December one and thus should have resulted in comparitively higher volume. The unabated slide in rupee has helped Infy to up their rupee EPS guidance once again to Rs.147.1 per share for FY12E. For Q4FY12, the INR EPS guidance is Rs.42.12 per share at a US$ conversion rate of Rs.52 per US dollar."

"Infy added 49 clients in Q3 (45 in Q2) out of which 6 are Fortune 500 companies. Pricing also saw a marginal improvement of 0.8% QoQ on a blended basis. Infy closed 5 large deal in Q3 of which 2 were $500mn+. Geographically, it is encouraging that two of those 5 deals came from Europe of which one is a $500mn plus deal. Infy added 3358 employees on a net basis in Q3. Verticalwise, Manufacturing showed the strongest sequential growth of 4.8% followed by Retail at 4.5%, Financial services at 3.1% and Energy & Utilities at 1.4%. The substantial investment in Europe by Infy in order to gain a strong foothold there has helped it to grab large deals from that region and show robust growth of 13.7% in Q3. The management further expects increased offshoring from Europe in the coming quarters which may even result in it growing faster than US."

"We believe the cut in US$ guidance as well as a flat guidance for Q4FY12 is an indication of lack of confidence on the part of the management on the overall demand scenario. A weak rupee can provide solace only for a limited period as we expect the INR to appreciate sooner than later. Factoring in weaker market sentiment for the Infosys stock on account of reducing dollar guidance for two consecutive quarters, we reduce our target PE multiple for Infosys to 21x from 23x earlier. We however up our revenue estimates factoring in a weaker INR than our previous expectation. We therefore arrive at a target price of Rs 3450 (Rs.3500 earlier) and maintain our 'BUY' call on the stock," says Arihant capital markets research report.

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