Hold Infosys; target of Rs 2500: Emkay

Emkay Global Financial Services has recommended hold rating on Infosys with a target of Rs 2500, in its April 12, 2013 research report.

• Mar’13 qtr show came in way below est with a 1.4 percent QoQ US USD revenue growth with margins slipping by ~200 bps sequentially to 26.5 percent, declining for 5th qtr in a row
• Profits at Rs 23.9 bn (+1.1 percent QoQ) beat est aided by better other income/tax reversals. FY14 guidance below par with Q4 performance denting confidence on pick up ahead
• Cut FY14/15E EPS lower by 8/7 percent to Rs 161/181 on lower revenue/margin assumptions. Downgrade to HOLD, TP Rs 2500( V/s Rs 2,900 earlier) on 14x FY15 P/E
• See stock finding support at Rs 2,100-2,150 levels given ~5 percent+ FCF yield. We see Infosys continuing to trade at ‘lower than historical / sector leader’ multiples given continuous negative surprises to street expectations

“IMar’13 qtr show has put to rest the hopes of a possible turnaround that were stoked by a better than expected Dec’12 qtr performance. Rev at US USD 1,938 mn (+1.4 percent QoQ) came in below our 4.3 percent QoQ growth exp with margins slipping sharply by ~200 bps sequentially to 26.5 percent (V/s our estimate of ~60 bps decline). In this context, it is worth highlighting that Infosys’s margins have continued to slip for 5 qtrs in a row now and are ~720 bps from Dec’11 qtr levels despite ~5 percent currency depreciation over the period. Profits at Rs 23.9 bn (+1.1 percent QoQ) came in ahead of est (Emkay est Rs 22.6 bn) aided by higher other income/tax writeback as op performance missed expectations. IT Services vol growth was ~1.8 percent QoQ (better than 1.5 percent QoQ witnessed in Dec’12 qtr) with pricing declining by 0.7 percent QoQ during the quarter. Quarterly annualized attrition jumped up to 20 percent+ yet again after some respite in Dec’12 quarter in a relatively benign supply side environment and is worrisome in our view given that Infosys implemented wage hikes in H2FY13 after deferring wage increments at FY13 start.”
 
“Infosys’s FY14 revenue guidance of 6-10 percent YoY growth is below exp (we expected a 12- 14 percent US USD rev growth outlook, it implies a 0.5-2 percent CQGR). We are more negatively surprised by co discontinuing from the practice of giving any margin/EPS outlook citing several margin headwinds from (1) volatile macro environment, (2) onsite staffing issues (which could limit a sharp pickup in utilization), (3) pressure on revenue productivity (co highlighting greater pricing headwinds in Business IT (an area where Infosys expects better growth) and (4) full yr impact of lower margin Lodestone business and wage increments implemented in H2FY13.”
 
“We cut our FY14/15E EPS lower by 8/7 percent driven largely by lower margin assumptions (we build in EBITDA margins at 25.9/26.7 percent V/s ~29.5 percent earlier) to Rs 161/181. Despite a 21 percent fall in stock price today, we only see some support emerging around Rs 2,100- 2,150 levels and thereby cut rating to HOLD, TP Rs 2,500( V/s ACCUMULATE, TP Rs 2,900 earlier). A strong and consistent improvement in fin performance will need to preclude any improvement in Infosys’s valuation multiples (at ~25 percent discount to sector leader TCS) which have seen significant compression over the past 3 years,” says Emkay Global Financial Services research report.

Institutional holding more than 40% in Indian cos

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Read More