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Brokerages cautiously positive on Infosys

Networth and Emkay have maintained an 'accumulate' on the stock, Religare 'hold' and Prabhudas Lilladher 'market performer'. Rel Power IPO | Special: Gold glitters!

INDIATIMES NEWS NETWORK|
Jan 15, 2008, 03.20 PM IST
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MUMBAI: Brokerages remain cautiously positive on Infosys Technologies post its third quarter earnings announcement. Networth and Emkay have maintained an ‘accumulate’ on the stock, Religare ‘hold’ and Prabhudas Lilladher ‘market performer’.

The target prices over a one year period also vary, with Prabhudas putting it at Rs1,730-- the lowest, followed by Networth at Rs 1,914 and Religare Rs 1,935. Emkay’s target at Rs 2,091 is the highest.

Networth has sounded caution on the rupee’s continued appreciation, while Emkay believes that despite the positive commentary from the company investors would await comments from offshore vendors to spot any signs of weakness going forward.

Religare expects the Q4FY08 guidance to serve as an indicator of the management’s growth expectations for FY09. It has revised FY08 earning estimate upwards by 2.1 per cent but decreased revenue by 1.1 per cent to factor in a stronger rupee.

Prabhudas remains neutral on the stock’s prospects going forward, given the modest growth outlook, uncertain forex environment and absence of any visible triggers.


Networth Stock Broking has recommended ‘accumulate’ on Infosys for a target price of Rs 1,914 in 12 months.

Infosys posted a mixed set of numbers, with sales growth at 4 per cent in rupee terms and 6 per cent in dollar terms over the last quarter, which were below expectations, Networth says in its analysis.

EBITDA margin at 32.6 per cent improved by 130 basis points, and net margin at 28.8 per cent was better than expected. This is largely a contribution of other income (Rs 158 crore) despite foreign exchange loss of Rs 19 crore and tax reversal of Rs 50 crore. This helped Infosys post an EPS of Rs 21.52.

Infosys’ shift to Europe continued (28.6% of total Q3 revenue), derisking the dependence on a single currency and geography, that is the dollar and US. High-end services like package implementation, consulting, testing continued to improve its market share, thereby improving realization.

The number of $90 million-plus clients increased by two in the December quarter. The total number of active clients was 530, with 47 clients added in this quarter. Given the high client additions, Networth is positive on Infosys’ prospects to mine clients further.

Networth remains cautiously optimistic for the future, but has sounded caution on the rupee front. Infosys may see a subdued FY08 due to rupee appreciation, with sales growth of 20.4 per cent and an earning per share growth of 22 per cent.

Networth expects pricing to go up by 3-4 per cent in the March quarter. New contracts are expected to come at 3-5 per cent increase, and existing contracts coming for renewal may be at 2-3 per cent upside.

For FY09, the brokerage expects sales growth of 36 per cent and an EPS growth of 20 per cent. The stock is currently valued at 15.7 times FY09 EPS of Rs 100.7 at Rs 1,580.

Emkay has maintained ‘accumulate’ on the stock for target of Rs 2,091 over a year. The brokerage expects Infosys to record revenue, EBITDA and net profit at CAGR of 22.2 per cent , 19.2 per cent and 15.7 per cent, respectively, over FY07-10.


The Infosys management has maintained that there are no visible signs of slowdown in demand precipitated by the US credit crunch. It cited evidence in the form of BFSI revenue growing 7 per cent (versus company average growth of 6.1%); revenue from US growing at 5.6 per cent quarter on quarter; and consulting and package implementation revenue growing 7.9 per cent. However, the management indicated that the clients’ IT budget finalisation had got delayed until early February.

The brokerage believes that despite the positive commentary from the company, investors would await results and subsequent comments from other offshore vendors to spot any signs of weakness going forward.

Emkay believes that the FY09 annual guidance for the Indian vendors as well as the Cognizant results should create further clarity on the prospects going forward.

Infosys reported revenues of $1,082 million in Q3FY08, up 6.1 per cent sequentially. The revenue growth was led by the top client with revenues growing by 28 per cent QoQ after two quarters of sublime growth. However, volume growth during the quarter continued to worry with billed volumes growing by 5.1 per cent QoQ, 25.2 per cent YoY. This is the lowest ever over the past 15 quarters.

The company’s operating margin expanded by 130 bps sequentially to 32.6 per cent in Q3FY08. The margin expansion was helped by lower selling expenses at 4.8 per cent.

Infosys reported sequential growth of 11.9 per cent in net profit at Rs 1,231 crore, higher than expectations driven by lower than expected effective tax rate (at 12% vs expected 15%) as there was a tax write back of Rs 50 crore during the quarter.

Religare has maintained ‘Hold’ on the stock with target price at Rs 1,935 for one year. The brokerage has raised FY08 estimates to factor in the better than expected Q3FY08 results. It has also increased the EPS margin estimate for FY09 as the company expects to utilize the leverage in SG&A expenses to maintain margins.

Religare expects the Q4FY08 guidance to serve as an indicator of the management’s growth expectations for FY09. However, the revenue growth guidance of 4.8-5.4 per cent does not provide any clear direction in this regard.

The management has guided towards revenue of Rs 44.8-45 billion in Q4FY08 with EPS growth of 5.3 per cent to Rs 21.4. For FY08, the company expects revenue to grow at 19.7-19.9 per cent and EPS at Rs 81.1, a growth of 17.1 per cent.

Considering the better that expected operational performance in Q3FY08, the brokerage is revising FY08 earning estimates upwards by 2.1 per cent. However, it has decreased revenue estimates by 1.1 per cent to factor in a stronger rupee at 39.1/$.

Religare expects FY08 EPS to be Rs 82.1 as against Rs 81.1 guided by the company. It also increased margin estimates for FY09 and thus EPS by 2.4 per cent.

Prabhudas Lilladher expects Infosys to report profit growth of 20.8 per cent, 19.5 per cent and 7.4 per cent in FY08, FY09 and FY10 respectively. Given the modest growth outlook, uncertain forex environment and absence of any visible triggers in the stock, the brokerage remains neutral on the stock’s prospects going forward.

At the CMP of Rs1,580, it quotes at 16.4x FY09E earnings. Prabhudas has maintained ‘Market Performer’ rating with a target price of Rs1,730 (18x FY09E earnings).
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