Buy Infosys - Target Price Rs. 4000 - JM Financial

Re-calibrated strategy -> industry leading growth -> EPS upgrades and multiple expansion

- Mid-course correction in strategy yielding desired results: Infosys launched the "3.0" initiative (CY11) with an ambition to drive growth in consulting and high end services. Despite a sound strategy, a weak IT spending environment particularly on the discretionary front resulted in significant revenue under-performance for the company (Infosys under-performed TCS in FY11/12/13). The company re-calibrated its strategy (discussed in next point) in 1HCY12, which we believe, will drive industry leading revenue growth in FY14. Acceleration in revenue growth will drive a) EPS upgrades (both revenue and margin led), and b) narrowing of the c.20% P/E multiple discount to TCS. We upgrade earnings (4%/12% in FY14/15E) and raise multiple to 18x against FY13-15E EPS CAGR of 17%, resulting in a Target price of Rs.4,000 which implies a 40% upside.

- Re-calibrated strategy at work - what has changed: a) Aggressive strategy in large deals which was largely a "no-go" area for Infosys prior to CY12, b) increased focus on infrastructure management which is a high growth space, c) willingness to takeover people and set up dedicated facilities in near-shore or onsite for customers, d) work at lower margins during the initial phase, for certain large clients (strategic or must have clients). Net-net, Infosys 1) has selectively diluted its high margin and premium pricing policy to drive revenue growth, and 2) is not willing to lose incremental revenue market share to competition (Infosys lost incremental share in banking vertical during CY09-11). All the above steps have expanded the addressable market for Infosys and will reflect in industry leading revenue growth in FY14 in our view.

- No dilution in focus on consulting and product and platforms: Product, Platform and Solutions (PPS) order book for Infosys has doubled (YoY) to US$600mn. Success in PPS results in increased brand equity with customer and should drive sole-sourced (non-RFP) deal wins in future.

- Infosys is our top pick: Return to industry leading growth and margin improvement should drive re-rating. TP of Rs.4,000 based on 18x FY15 EPS.E

Source : Equity Bulls

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