Infosys - Rating: SELL; Target Price: Rs2,870 - Centrum

We expect Infosys to have sluggish revenue growth relative to peers due to deliberate offshore shift in delivery and also due to possible impact of lower billing rates with existing clients as it struggles to change its earlier premium positioning.

Led by sharply lower S&M expenses due to the recent cost cutting measures, we expect Sales and Marketing costs to decline by 4.4% QoQ. We expect EBITDA to expand by 58bps QoQ (excluding the INR 2,190mn provision made in 2QFY14 towards settlement of a case relating to visa abuse) as G&A normalizes over this quarter to 5.9% of revenue

With SAP and Oracle license revenue sales growth depending more on HANA and cloud SaaS solutions which have low service multipliers, we think that discretionary spending for IT Services amongst clients is directed at solutions outside of packaged software implementation. SAP's 3QCY13 results have shown a trend of declining large license sales (licenses sales for >EUR5Mn were down over 21% YoY). We are concerned that Infosys, with over 25K Oracle consultants, has considerable exposure to package implementation. We estimate this to be as much as 23-25% of revenues as the horizontal of Consulting and System Integration was earlier reported separately as recently as 2QFY12 and Consulting & Package Implementation accounted for 24.7% of revenue in 2QFY12 with System Integration accounting for 6.0% of revenues. We are also concerned that its declared shift to move more work offshore might mean that it will not be able to gain much revenue traction from the new areas of discretionary technology spending (which is more onsite-centric).

With revenue growth that will likely lag the peer group (we expect a leaky revenue bucket over FY15 due to billing rate loss and client losses as Infosys sheds its earlier premium positioning) and margins that are being propped up by short-term cost-cutting measures (even as Infosys has stated its intention to increase offshore delivery, we note that Accenture and TCS are increasing onsite hiring, with Accenture specifically stating that it deems it necessary to meet new areas of discretionary spending such as digital and analytics), we maintain SELL with a Dec'14 TP of Rs 2,870 based on 12x 1-year Fwd EPS at Dec'14 (Vs our Sep'14 TP of Rs 2,690 earlier).

Source : Equity Bulls

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