Accumulate Infosys; target Rs 2875: KRChoksey

KRChoksey is bullish on Infosys and has recommended accumulate rating on the stock with a target price of Rs 2875 in its January 13, 2013 research report.

"The positive surprise at both key fronts i.e. revenue growth and EBITDA margin in Q3 FY13 is Infosys specific trend rather than industry wide improvement in demand environment, as the company is realizing benefit from corrective measures undertaken by it in recent past such as grant of more freedom to business unit in pricing and deal structuring to curtail market share loss to peer sets. Hence, extrapolating outperformance by Infosys in Q3 FY13 to all peer sets stage for disappointment especially in case of Wipro. Moreover, we expect Infosys to maintain growth momentum in coming quarters, considering increase in aggression of the company in traditional service line and the same is reflected from 8 large outsourcing deals signed by the company with total contract value of $731 million in Q3 FY13. Further, we believe, even in scenario of marginal decline in billing rate on account of change in portfolio mix (i.e. increase in revenue share of outsourcing projects), the company will be able to maintain its margins in narrow range supported by increase in utilization rate. Consequently, we believe there is more upside to stock price despite today's spike in price.

The company reported revenue of $1,872 mn i.e. growth of 4.2% QoQ in USD terms (excluding $39 mn revenue contribution from Lodestone) in Q3 FY13 versus our expectation of organic revenue growth of 1.2% QoQ (in USD terms). The better than expected revenue growth is due to strong traction registered in ERP and Consulting led by faster than expected ramp-up of transformational projects.

The company registered modest volume growth of 2% QoQ; whereas on back of traction in transformational projects which has relatively higher billing rate, offshore billing rate improved by 2.3% QoQ and onsite billing rate increased by 3.7% QoQ. Improvement in offshore billing rate in Q3 FY13 after registering decline in the four previous quarters came as a positive surprise; however in next couple of quarters we expect billing rate to be stable as the growth is expected to be primarily led by large outsourcing deals signed in Q3 FY13 which has relatively lower billing rate as compared to transformational projects.

Inspite wage hike for offshore based employees (adverse impact of 100 bps on margins) and INR appreciation against the USD (negatively impacted margins by 20 bps) in Q3 FY13, EBITDA margin declined only by 64 bps QoQ (versus our expectation of decline by 157 bps QoQ) assisted by improvement in offshore billing rate and decline in General & Administration expenses by 2% QoQ.

Valuation and view: Considering increase in aggression of the company in traditional service line which is also reflected from large number of deal wins in outsourcing space, we expect Infosys to maintain growth momentum in coming quarters. Taking the same into account, we maintain our 'ACCUMULATE' recommendation on the stock with a price target of Rs 2,875 by assigning multiple of 16.5 times (around 10% discount to TCS target P/E multiple)to its FY14E EPS of Rs.174.2," says KRChoksey research report.

Institutional holding more than 40% in Indian cos

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