Infosys - Losing momentum; initiate with Hold - Anand Rathi

In 2QFY13, Infosys hit the lowest volume growth in the past 11 quarters (8.3% yoy) by all indicators and the trend is expected to continue. It is likely to miss its FY13 (organic) guidance of 5%, and could therefore lower it. However there is a possibility they could leverage its cash in hand to acquire growth through inorganic means. But there is no clarity or certainty on the same. Hence we initiate coverage with a Hold and target of Rs.2,500.

- Volume, pricing remain under pressure. In 2QFY13, Infosys clocked 8.3% yoy volume growth - the lowest in the past 11 quarters. For almost four quarters, pricing has been under pressure. We see no indicators of it easing.

- Guidance misses a norm. After missing its 4QFY12 guidance, Infosys is set to miss/downgrade its FY13 revenue guidance of US$5% organic growth. To reach this, it needs a ~3.6% CQGR in 2HFY13, which we believe is on the higher side, given the usually weak second half and losses suffered due to Hurricane Sandy. We estimate ~3.7% growth in FY13.

- Inorganic growth could save the day. With Rs.272bn in cash and liquid investments (FY13e), Infosys has enough gunpowder to go aggressive on inorganic growth. Its 3QFY13 Lodestone acquisition (US$350m) is just the beginning, we believe. We expect the company to leverage its strong balance sheet and fill gaps in products & clients in an inorganic manner.

- Valuation. We value Indian IT services companies on a P/E basis relative to their past trading range compared with both peers and growth rates. We value Infosys at 14.5x FY14e. We believe the multiple is justified since the company could report modest 9.4% earnings CAGR over FY12-15e. High ROE (27.4%) could provide some support on valuation. Risks. Concentration in consulting/PI which are discretionary in nature; lowerthan-expected demand ramp-up in the US.

Source : Equity Bulls

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