Reduce Infosys; target of Rs 2352: KRChoksey

KRChoksey is bearish on Infosys and has recommended reduce rating on the stock with a target of Rs 2352 in its October 15, 2012 research report.

“Pressure on offshore billing rate for the fourth consecutive quarter indicates structural issues rather than aberration as indicated by the management in previous quarter. We believe, in the environment of limited growth opportunities, the company will continue to be under significant pressure to maintain its market share by offering discount to existing and perspective clients. Hence, in such a scenario maintaining EBITDA margin will be serious challenge for the company. The situation for the company will improve only in case of spending picking up for discretionary projects, which we believe is unlikely till clients new IT budget cycle begins i.e. FY14. Taking the same into account and wage hike announced by the company, we expect EBITDA margin will come under further pressure in H2 FY13E leading to downgrade in consensus earning estimates for FY13E and FY14E. Consequently, we believe there is more downside to stock price despite yesterday correction and hence we maintain our “REDUCE” recommendation on the stock.”

“Revenue grew by 1.7% QoQ in USD terms (after adjustment for reversal of accrued revenue of $15 mn in Q1 FY13) against our expectation of increase in revenue by 3% QoQ in Q2 FY13. Disappointment at revenue front is primarily due to continued pressure in two major verticals i.e. Banking and Telecom. Moreover, decline in offshore billing rate for the fourth consecutive quarter in Q2 FY13 (i.e. around 7% YoY in Q2 FY13) adversely impacted overall revenue growth rate. EBITDA margin declined by 150 bps QoQ to 29.1% in Q2 FY13 against our expectation of increase in margin by 68 bps QoQ; despite improvement in utilization rate (including trainees) by 260 bps QoQ to 69.6%. The dip in margin is led by lower than expected offshore billing rate and increase in “Provision for Post Sales Clients Support” by 53 bps QoQ as percentage of sales in Q2 FY13.”

“We believe wage hike announcement, INR appreciation against the USD and pressure on billing rate will lead to further downgrade in consensus earning estimates and hence expect more downside to the stock price despite recent correction. Taking the same into account, we maintain our REDUCE recommendation on the stock with a price target of Rs.2,352 by assigning multiple of 14 times to its FY14E EPS of Rs 168,” says KRChoksey research report.

Non-Institutions holding more than 90% in Indian cos

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