Buy Infosys; target of Rs 4600: Religare Capital

Religare Capital`s research report on InfosysGood growth with improvement on margins: Revenues increased 3.9% CC QoQ to US$ 2.2bn, above expectations, driven by 3% QoQ growth in IT service volumes. EBIT margins expanded 100bps QoQ to 26.1% driven by higher utilisation, lower employee costs and INR depreciation. PAT at Rs 30.9bn (+7.3% QoQ) was ahead of expectations due to foreign exchange gains and higher operating margins. FY15 guidance maintained: INFO’s FY15 US$ revenue growth guidance of 7–9% translates into a CQGR of 1.4–3.8% for the fiscal’s remaining quarters. Management commentary points to a soft quarter in Q3FY15 due to seasonality; however guidance retention is still a positive surprise given strong FX headwinds. While margins were in line with expectations, we note that management is investing aggressively in S&M which should augur well for future growth. As such, INFO expects to maintain margins in a narrow band of 25-26% over the next 2 years. LTM attrition picked up to 20.1% (up from 19.5% QoQ) and is a concern. View: We expect INFO to generate 2.5% CQGR revenue growth for the fiscal’s remaining quarters. We largely maintain our higher than street estimates and expect the company to deliver 14% INR EPS growth over FY15-FY16 (assuming INR/USD at Rs 61). INFO is taking the right steps by refocussing on execution and more clarity on new strategy will be a key for future earnings delivery. Maintain BUY with a Dec’15 TP of Rs 4,600 based on 17x one year forward earnings. "INFO’s Q2FY15 US$ revenues rose 3.2% QoQ (RCMLe: 2.5%) led by a 3% growth in volumes; in CC terms, revenue grew by 3.9%QoQ. EBIT margins improved 100bps QoQ, in line with our estimates. INFO maintained its FY15 US$ revenue growth guidance of 7–9%, despite cross currency headwinds, implying an achievable 1.4–3.8% CQGR for the fiscal’s remaining quarters. Valuations at 15.8x FY16E EPS are reasonable, and we maintain estimates with a Dec’15 TP of Rs 4,600. BUY,” says Religare Capital research report.

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