Hold Infosys; target of Rs 1010: Edelweiss

Edelweiss' research report on Infosys

Infosys’ Q2FY18 revenue, at USD2,728mn (up 2.9% in USD, 2.2% in CC), belied Street’s 3.5% estimate. However, operating margin, at 24.2%, yet again beat Street’s 23.6% forecast. The company cut FY18 CC revenue growth guidance to 5.5-6.5% (from 6.5-8.5%) on weaker H1, but maintained margin guidance at 23-25%. Commentary on key issues: 1) CEO search is on track; 2) no merit in allegations of wrongdoing in acquisition of Panaya & severance payment to former CFO; and 3) design, consulting and technology services portfolio will continue to determine strategic direction. We believe, leadership vacuum is the key challenge for revenue growth and appointment of CEO is crucial for the stock’s rerating. Maintain ‘HOLD’ with TP of INR1,010.

Outlook

We attribute the guidance cut and revenue growth disappointment to CEO churn. We reiterate that Infosys has highest margin levers, but appointment of CEO is key for revenue growth and the stock’s rerating. The stock trades at 12.8x FY19E EPS. We maintain ‘HOLD/SP’ with TP of INR1,010 (14x FY19E EPS).