Buy Infosys; target of Rs 1175: Systematix

Infosys reported better-than-expected results, largely on improved OPM performance, as revenue growth was expected to be low, on account of RBS/seasonal factors. Revenue declined 0.3% in CC terms, as it saw the impact of RBS deal ramp-down and furlough-led impact in the quarter (reported revenue growth beat our estimate by 30bps). OPM was up 20bps qoq at 25.1%, despite weak volumes, as it saved on S&M efficiencies and better employee cost management (utilisation improved marginally, headcount add negative, lower variable pay in the quarter). PAT was well ahead of our estimate, with a 2.8% qoq growth at Rs 37bn (Sys. estimate at Rs 35bn).

We believe Infosys’ growth/margin convergence and visible prospects of an improvement versus TCS has helped in a narrowed valuation gap. Infosys CEO Vishal Sikka has been successful so far to introduce the right and relevant changes to the organisation, which now only need to be tested for its objective of improved employee productivity. We maintain a positive view on the stock but attribute a lower valuation multiple, compared to TCS with similar growth expectations, given the frequent volatility in financial performance. We maintain an Accumulate rating on Infosys, with a revised target price of Rs 1,175, valued at 16x Sept ’18e earnings (target price lowered from Rs 1,200).