Reduce Infosys; target of Rs 2357: Asit C. Mehta

Asit C. Mehta is bearish on Infosys and has recommended reduce rating on the stock with a target of Rs 2357 in its October 12, 2012 research report.

“Infosys Ltd. (Infosys) declared its Q2FY13 numbers results, which were slightly below estimates on the top line and PAT front. The results were also lower than our expectations, even after getting a cushion from the Other Income front. In $ terms, the company reported 2.5% QoQ revenue growth at $1,797 mn, lower than our estimate of $1,806 mn and the street’s expectations of $1,810 mn. In Rupee terms, the company reported revenues of Rs98.5 bn, (a growth rate of 2.5% QoQ) against our estimate of Rs99.1 bn. The operating margin took a hit of 166 bps during the quarter and was reported at 26.3%. This was due to higher subcontracting costs which have trebled over the past one year and certain provisions. We expected the operating margin to remain stable at 28%. The PAT at Rs23.7 bn was in-line with our estimates.”

“The management commentary does not suggest a material improvement in the demand environment very soon. Operating metrics like relatively high attrition and persistent investments in the new strategy could exert further pressure on the operating margin. As of now, the road to recovery for Infosys seems to be a prolonged one. We believe that at present, taking a purely valuation call on Infosys seems like an imprudent strategy. At Rs2,393, the stock is currently trading at 14.9x FY13E EPS of Rs160 and 14.2x FY14E EPS of Rs168. We continue to value Infosys at 14x the FY14E EPS, thereby arriving at a price target of Rs2,357. We thus advice investors to REDUCE their exposure to this stock,” says Asit C. Mehta research report.

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