Analysts remain bullish on Infosys

At an analyst meet last week, information technology giant Infosys, led by Vishal Sikka, said that it will give a clearer guidance for revenue growth post the September quarter. The move assumes significance as recently, one of its key clients – Royal Bank of Scotland (RBS) – decided not to pursue its plan to separate and list a new bank – Williams & Glyn (W&G).

Also Read: Is Infosys’ valuation discount to TCS justified?

This comes at a time when Infosys has already recast its annual revenue guidance for FY17 in the while announcing its results for the June 2016 quarter to 10.5 – 12% in constant currency (CC) terms, as against a market expectation of 11.5 – 13.5%.

On Monday, Infosys was trading flat at Rs 1,018, a marginal fall of 0.2%, or Rs 2 at 11:45am. By comparison, the Nifty50 index, too, was trading flat at 8,574 levels. Despite the headwinds, most analysts remain bullish on the stock and have maintained a ‘buy’ rating post the analyst meet last week.

Also Read: Is it a good time to buy Infosys?

Here is how leading brokerages across the country have interpreted the management commentary.

MOTILAL OSWAL RESEARCH

We expect Infosys to grow its revenue at a CAGR of 10.6% over FY16-18 and EPS at a CAGR of 10.7% during this period. We believe that Infosys is investing in all the right areas to regain and sustain its growth leadership, compounded by industry leading margins. Our price target of Rs 1,300 discounts two year forward earnings by 18x. Notwithstanding the headwinds over the near term, Infosys’ gradual recovery to industry-matching / industry-leading growth at a strong margin will command a premium to peers. Maintain Buy.

RELIGARE INSTITUTIONAL RESEARCH

Infosys clarified that it has arrested the factors (consulting, India business and Finacle) that led to an overhang on growth in Q1 and thus expects to perform better in Q2. That said, the company has seen a worsening business environment post Q1 with some slowdown in deals after Brexit (RBS a case in point). We expect the near-term share price performance to remain sluggish given concerns over FY17 guidance and the impact of Brexit on decision making. These factors will add to near-term volatility in the sector but we think Infosys’ valuations are inexpensive at 14x FY18E P/E (price-to-earnings). Maintain ‘Buy’ rating.

Also Read: Infosys says seeing client-specific softness after Brexit

IDBI CAPITAL

We are reassured that its ‘Renew’ and ‘New’ strategy is progressing well. Our biggest take-away was Infosys’ target to become a strategic partner for at least 250 clients in 4-6 quarters and it is gearing itself very well to achieve the same. We believe this would complement their 2020 vision. We continue to believe that Infosys would continue to outperform the sector in the medium-to-long term. However, given the near term headwinds we expect Infosys to moderate its FY17 revenue guidance of 10.5%-12% in CC by 50-100 basis points (bps).

The current weakness in the stock provides a good opportunity to buy for medium-to-long term. We maintain BUY with new target price of Rs 1,268 based on PER of 18x FY18E.

Also Read: IT firms get stricter on staff performance

NIRMAL BANG

We believe Infosys will lower its revenue growth guidance by at least 150bps-200bps and possibly err on the side of conservativeness as it may not want to cut numbers for a third time in an uncertain macro and industry environment. What we have been struck by at analyst meets of Infosys and HCL Technologies in the past few days were frequent references to self-cannibalisation of revenues.

We continue to retain ‘Sell’ rating on Infosys with a March 2017 target price of Rs970 (down 5% from the CMP), based on 14.4x FY18E EPS. Our Sell rating is based on the view that the IT sector’s revenue growth and P/E multiple are likely to contract in the base case scenario that we have assumed for US economy in 2016 and 2017.

HDFC SECURITIES Marketing

Our conviction on Infosys remains intact led by: 1) improving market share, buoyed by large deal wins; 2) higher resilience in BFSI over peers; 3) increased automation impact on efficiencies in fixed price contracts (44% of revenue); 4) continued evidence of ‘renew’ as seen in the multi-vertical / services skilling plus a recast of sales performance incentives; 5) proof of better execution ably supported by the early success of the MANA automation/AI (artificial intelligence) platform.

We revise FY17E US dollar revenue growth to 9.7& (10.7% earlier) factoring near-term client-specific headwinds, while earnings per share (EPS) remains unchanged on EBIT (%) of 25.5/26.1%. Infosys is attractive at 13.6x FY18e and we maintain BUY rating with a target price of Rs 1,350, 18x FY18e EPS.

Also Read: Brexit worries for IT

EMKAY GLOBAL

We have cut our FY17/18E revenue growth to 9/10.2% (V/s 10.3/11.7% earlier and below company’s current FY17 guidance of 10-11.5% US$ growth) thereby driving around 3% cut in earnings estimates to Rs 61/68.4. Retain a ‘hold’ rating with a target price of Rs 1,100 (v/s Rs 1,160 earlier).

Continue to back our thesis of ‘Downside risks to modest growth expectations’ for the sector. Recent commentary across players continues to corroborate that with the sector headed for a very rough FY17 (and most likely H1FY18) in our view. Maintain ‘Hold’ rating.

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