Buy Infosys; target Rs 3800: Emkay

Emkay's research report on Infosys

• Revenues at US$ 2,066 mn (+3.8 percent QoQ) beat exp (Emkay est: +2.8 percent QoQ rev growth) albeit EBIT margins remains flat QoQ as S& M expenses increased 60 bps QoQ to 11.8 percent
• Operating metrics performance show return to consistency with broad based growth across verticals/geographies. Top 10 clients revenue growth highest in over 12 qtrs at ~6 percent QoQ
• Deal wins remain encouraging. See upsides to Infy’s FY14 revised revenue growth guidance of 9-10 percent. We build in 12.3 percent US$ revenue growth for FY14
• Raise FY15/16E EPS by ~3 percent each led largely by higher rev assumptions (12.6 percent YoY growth V/s 11 percent earlier). Infosys remains the top pick in Tier I space as we continue to back ‘Return to Predictable ways’ for Infosys

Infosys reported revenues at US$ 2,066 mn (+3.8 percent QoQ) beating expectations (Emkay est: +2.8 percent QoQ) with offshore volumes (+4.3 percent QoQ, highest in over 8 quarters) driving growth for the company. EBIT margins were flat sequentially at 23.6 percent (V/s our expectations of ~80 bps increase) but we see no reason to change our thesis on ‘Reversion to Mean margins’ at Infosys as margins were impacted adversely by ~60 bps increase in Sales and Marketing expenses( S&M expenses up ~30 percent sequentially in absolute INR terms). Profits at Rs 24.1 bn (+1.4 percent QoQ) were lower than expectations however were impacted adversely by provision for US visa case settlement of ~US$ 35mn). Operating metrics was decent with broad based growth across geographies / verticals and top clients (note that top 10 clients grew by ~6 percent sequentially which was the highest in over 12 quarters). Offshore volume growth also picked with offshore volumes increasing by ~4.3 percent QoQ with offshore proportion of revenues increasing by 70 bps QoQ to 47.5 percent and utilization (including trainees) increasing by 380 bps to 74.5  percent (closer to the highest in co’s history).

An improvement in deal activity coupled with Infosys’s refocus on the traditional Business IT services space has resulted in decent deal wins in the current quarter (co announced 5 large deals with TCV of US$ 450 mn out of which 3 came from financial services and 2 from US and Europe respectively) and should assuage investor concerns on pick up in revenue growth ahead. We reckon Infosys’s revised revenue growth guidance of 9-10 percent still remains very conservative (implies a 2 percent and 1 percent sequential decline in revenues over the next 2 qtrs at the lower end and upper end respectively) and thereby increase our revenue growth estimates to 12.3 percent /12.6 percent (V/s 11 percent earlier).

We tweak our FY15/16 earnings higher by~3 percent each to Rs 224/253 respectively driven largely by higher revenue assumptions. We continue to back ‘Returns to predictable ways’ at Infosys with Sep’13 quarter a good start in that direction. Infosys remains our top pick in the Tier I space. BUY stays with a revised TP of Rs 3,800," says Emkay Global Financial Services research.

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