Buy Infosys; target of Rs 2850: Prabhudas Lilladher

Prabhudas Lilladher is bullish on Infosys and has recommended buy rating on the stock with a target of Rs 2850 in its July 18, 2012 research report.

“Infosys reported one of the sharpest declines in realization, since the Lehman crisis. The realization dip in Q1FY13 was attributed to cross-currency (0.7%), revenue writeback (0.9%) and portfolio shift (~0.4%). On a like-to-like basis, pricing declined by ~1.7% QoQ compared to TCS’ 1.06% QoQ. We expect weakness in pricing to persist due to: 1) Aggressive marketing to grab the market share 2) Commoditized businesses have no nuances to offer to clients. However, the pricing cut may or may not always be accompanied by volume growth. Attributing realization dip to one particular reason is tough as there are multiple moving parts to its calculation. However, different reasons for pricing decline could impact volume growth differently.”

“Infosys’ management highlighted vendor consolidation as one of the key trends in the market. The process of vendor consolidation is generally accompanied by pricing discount to grab market share from competition. The vendor consolidation process impacts the overall portfolio pricing; however, it is also accompanied by volume growth.”

“We see this as one of the possible outcomes of Infosys’ current pricing discount. Infosys’ portfolio is geared towards a discretionary spend, which is currently witnessing weakness. As low-realization services like IMS, BPO and ADM contribute to growth, the shift in portfolio results in lower blended realization. This may not result in any change in volume expectation as the growth from different services follow different cycles. Any change in strategy for Infosys to grab market share away from peers at lower realization would be disruptive to the competitive landscape. Infosys’ management highlighted the opportunistic exploitation by clients to lower the rates. We expect this to put structural pressure on realization and disrupt the competitive landscape. However, this could result in volume growth with a lag. Infosys is currently trading at 11.3x FY14E earnings estimate, a trough valuation at which it traded post Lehman crisis. Retain BUY due to valuation comfort,” says Prabhudas Lilladher research report.

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