Accumulate Infosys with target price of Rs. 3460 - Angel Broking

Infosys (NYSE:INFY) reported a healthy set of results for 2QFY2014 with dollar revenues significantly ahead of estimates (by 3.8% qoq). The constant currency revenue growth was of 4.2% qoq led by a 3.1% qoq volume growth (largely offshore led). Infosys has revised its USD revenue growth guidance for FY2014 to 9-10% from 6-10% given earlier. This implies a sequential decline of 1% qoq in run rate in 2HFY2014 at the higher end of the guidance, which is conservative in our view. We recommend an Accumulate rating on the stock.

Quarterly highlights: For 2QFY2014, Infosys reported a revenue of US$2,066mn, up 3.8% qoq, led by a 3.1% qoq volume growth. In INR terms, revenue came in at Rs. 12,965cr, up 15% qoq. The company posted an almost flat EBIT margin (adjusted basis) on a sequential basis at 23.6%, as the gains due to INR depreciation got absorbed by the negative impact of wage hikes given during the quarter. The company took a provision of US$35mn (Rs. 219cr) due to potential US fines on visa violations; the matter is currently under discussion with the US Ministry of Justice. Adjusting to that, the PAT came in at Rs. 2,626cr, up 10.6% qoq.

Outlook and valuation: The Management commentary indicated that though the deal pipeline seems to be better than what is was the same time last year, the company continues to remain focused on bringing back the growth momentum. We believe a healthy 1HFY2014 performance increases the probability of the company beating its top end of the guidance. Over FY2013-15E, we expect USD and INR revenue to grow at a CAGR of 11.2% and 17.6%, respectively. The recent high-profile exits from the company could remain an overhang on the stock in the near term. But still the recent overall changes essential to drive competitiveness in traditional services, especially the cost rationalization drive (improving utilization both onsite and offshore, aligning onsite costs with project/market requirements, more location optimization, etc.) are steps, in our view, in the right direction. We value the stock at 16x FY2015E EPS of Rs. 216.2, which gives us a target price of Rs. 3,460 and recommend an Accumulate rating on the stock.

Source : Equity Bulls

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