Buy Infosys; target of Rs 1300: JM Financial

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JM Financial's research report on Infosys

Infosys (INFO) kept the hopes of a demand recovery live with an in - line 4QFY18 results/FY19 guidance. However, the unexpected lowering of the EBIT margin band to 22 - 24% (from the current 23 - 25%) was a disappointment, especially given the currency tailwinds. The reasons  for reset appear to be micro  – increased investments in digital capability + capacity expansion  to  quickly  develop a services - driven digital busine ss (vs. the product/platform approach under  Vishal Sikka) ; macro variables are stable  – INFO indicated minimal pricing pressures and FY19  wage inflation is similar to FY18. We expect the margin impact to be concentrated in the near - term and stabilise over FY20; INR depreciation could be an incremental support. Thus, while we have cut our FY19/FY20 EPS forecasts by 3%/2%, we stay positive on the stock.  An 11 % dividend+potential buyback yield is a key downside suppot.

Outlook

While there could be a weakness in the immediate term for the stock on margin disappointment, we expect it to be transient. A steady, albeit slow, recovery in demand + a n 11% dividend+potential buy - back yield should keep investors engaged , in  our view. Our PT is unchanged at 1,300 and values INFO at 16x 12 - month s forward PER.

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