Buy Infosys; target of Rs 4500: ICICIdirect

ICICIdirect.com`s research report on Infosys“Infosys reported stellar Q2FY15 earnings led by growth in the US, Europe, energy and utilities vertical. Constant currency (CC) revenues grew 3.9% while $ revenues grew 3.2% QoQ to $2,201 million, ($2,186 million, 2.5% growth estimate). Consolidated IT services grew 3.6% QoQ, led by volumes (3%). EBIT margins improved 96 bps QoQ to 26.1% (25.5% estimate) while net income came at Rs 3,045 crore vs. Rs 2,624 crore estimate led by margin beat and higher other income. Infosys maintained its FY15E US$ revenue growth guidance of 7-9% YoY. The company announced a 1:1 bonus issue of equity shares and 1:1 stock dividend of ADR shares. Infy also announced an interim dividend of Rs 30/share.” “Q2 marked the first earnings address of Dr. Sikka who impressively laid the road ahead for building Infosys into a next generation services company. The company aspires to regain the bellwether status by achieving consistent profitable growth through the use of innovation, newer technologies, automation and employee re-skilling. The company also plans to renew each and every service currently being offered and augment them with new services along with new technologies such as big data and analytics. From an FY15E perspective, though Infosys maintained its 7-9% YoY growth guidance, we believe it has its work cut out in achieving the same. The rationale is with 2.3% growth in Q1 and 3.1% in Q2, Infosys now needs 2.6% CQGR in H2 to achieve the midpoint of its guidance vs. 3.2% earlier, had it delivered 2.5% QoQ growth in Q2, in line with our estimate. Though Q3 and Q4 are seasonally soft the management noted the large deal wins and client additions may aid.” “We estimate Infosys will report revenue, EPS CAGR of 8%, 12%, respectively, over FY14-16E (with average 25.7% EBIT margins in FY15- 16E), slower than 18.2%, 12.2% reported during FY09-14 along with average 28.1% margins. Though the earnings trajectory could improve over time, the incoming CEO continues to impress with his strategic direction. The FY16E EPS upgrade coupled with target multiple raise to ~19x, 10% premium to its FY09-14 one-year forward PE average of 17.7x, leads to a revised target price of Rs 4500 and BUY rating vs. HOLD earlier,” says ICICIdirect.com research report.  

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