Hold Infosys; target of Rs 2277: KRChoskey

KRChoskey has recommended hold rating on Infosys with a target of Rs 2277, in its July 13, 2012 research report.

“Infosys, reversal of accrued revenue (i.e. $15 mn in Q1 FY13) due to cancellation of transformational project by Europe based client led higher than expected decline in revenue. Beside the impact of revenue reversal, pricing discount given to BFSI clients and decline in revenue productivity due to change in service line mix led decline in blended billing rate by 310 bps QoQ (in constant currency terms) in Q1 FY13 which in turn resulted in dip in EBTIDA margins by 201 bps QoQ against our expectation of improvement in EBITDA margins by 60 bps QoQ. The management has revised downward its minimum revenue growth guidance for FY13E from 8% to 5% (in USD terms) primarily due to decline in revenue productivity, instances of billing renegotiation by clients and business environment concerns (as reflected from ramp downs and cancellation of projects by clients). We believe, recent stock price correction partially reflects both stock de-rating as well as scale down in market estimation of FY13E EPS and hence there is limited scope for major run up from the current level in near term. Considering the same, we maintain our “HOLD” recommendation on the stock.”

“EBITDA margins declined by 107 bps QoQ to 32.6% in Q1 FY13 against our expectation of increase in margins by 60 bps QoQ. The higher than expected dip in margins was led by lower than expected blended billing rate. Whereas, hiring of locals in US (around 700 employees) and visa cost adversely impacted margins by 160 bps QoQ as indicated by the management which was mitigated by positive impact of INR depreciation against USD (contributed around 390 bps QoQ to margins). The management has indicated that challenges in BFSI and Package Implementation which constitutes around 58% of total revenue (after excluding overlapping revenue) will continue for next couple of quarters. Moreover, the company is witnessing instance of pricing re-negotiation in case of BFSI segment. We believe this is company specific issue especially on account of its premium pricing (for instance premium of around 30% compared to HCL Technologies and around 10%to Wipro) in current challenging environment which is hampering it adversely especially in commoditized space such as ‘Run-the-Business’ segment. Hence, considering the same we expect Infosys to underperform peer sets in terms of revenue growth for next couple of quarters.”

“We believe today’s correction in price has factored into near term slower growth than peer sets (especially TCS, HCL Tech and Cognizant) and hence we maintain our ‘HOLD’ recommendation on the stock with a price target of Rs.2,277 by assigning multiple of 14 times to its FY13E EPS of Rs.162.7,” says KRChoskey research report.      

Non-Institutions holding more than 90% in Indian cos

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