Dolat Capital's report on Infosys
Infosys, we believe the 11 percent volume growth and 1 percent pricing gain in 9MFY14 in IT Services along with3QFY14 OPM in line with FY13indicates sustenance of the company on improvement trajectory and further reinforce over belief of recovery in business momentum which may lead to growth convergence with peers. The growth metrics (across geos, verticals and service line) and commentary has been getting better across the board and is demonstrated well in terms of new client/deal addition (188 in 9M). We believe the earnings growth would move faster than revenue growth driven by likely OPM expansion in account of volume leverage, improved utilisations and Fx tailwinds.We believe there is lots of room for rerating in the stock given the recent sector re-rating andthus maintain our positive view on the stock given improved financial and relative economical valuations with a target price of Rs 4444 valued at 17x FY16E earnings.
Infosys reported revenues inline with a topline growth of 1.6 percent QQ at $2.1bn (Reported currencyrevenues at Rs 130bn (DE at Rs 131bn). Operating profits were better than estimates at Rs 32.6bn (DE at Rs 30bn) with OPM at 25 percent as it improved on utilization and offshore shift of about 1 percent QQ. Profit were upby 19 percent QQ at Rs 28.7bn better than our estimates of Rs 25.8bn owing to strong other income (up 43 percent QQ).
NRN believes that senior management exits is a loss but the strong leadership program can quick fill the gaps and believes the new structure of two presidents one each focusing on marketing and delivery is best suited in the current environment and thus would help it regain its lost aspirational value for all stakeholders – employees, clients and investors. We believe the presence of NRN has bolstered the confidence and momentum within the company which coupled with improved demand scenario would help Infosys to mark a strong comeback in terms of comparable financial performance.
We have revised our FY15 Rev/EPS estimates by 3 percent to account for better volumes and stable margins hereon. We expect Infosys to gradually retain back its OPM levels to 26 percent+ over next 4 quarters which may further drive up its rerating.
Valuations: "We believe the quarterly financials are better than expected in terms of guided revenue run rate and recovery in profitability. The stock had a run up pre earnings given likely upgrade on volume growth for FY14/15 as street assume Infy to surpass its muted implied guidance for H2. We believe that stock is likely to see upgrades of 4-6 percent in FY15/16E in its Revenue and earnings given conservative assumptions built in for Infosys given its volatile performance in the past. We believe there is lots of room for rerating in the stock given the recent sector re-rating wherein the gap has been narrowed between Infy and peers Wipro/HCLT (weaker in terms of volume/margins respectively). We maintain our positive view on the stock with a TP of Rs 4444 valued at 17x FY16E earnings (TP rolled over from FY15 to FY16). Buy the stock," says Dolat Capital research report.
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