Infosys - 3QFY2014 Result Update - Angel Broking

Infosys, in its 3QFY2014 results, reported operating margins ahead of our expectations, but the top-line came in below our estimates. The key positive surprise in the result was the expansion in the EBIT margin by ~145bp qoq to 25%, while the key negative surprise was a muted volume growth of 0.7% qoq. The company has revised its USD revenue growth guidance for FY2014 to 11.5-12% from 9-10% given earlier, implying a USD revenue growth of 1.4% qoq for 4QFY2014 (to meet the upper end of guidance), which seems attainable. We recommend an Accumulate rating on the stock.

Quarterly highlights: For 3QFY2014, Infosys reported a revenue of US$2,100mn, up 1.6% qoq, led by a 0.7% qoq volume growth and 0.7% sequential rise in blended realization. The company posted an EBIT margin growth of 145bp qoq to 25.0%, led by operational efficiency with an inch up in utilization level and sequential decline in selling and marketing (S&M) spends. The PAT for the quarter came in at Rs. 2,875cr, up 9.5% qoq, aided by a healthy operating performance as well as higher other income at Rs. 731cr as against Rs. 510cr in 2QFY2014.

Outlook and valuation: The company's Management opined that the global economic environment has improved and looks exciting for the IT services industry. The company expects client budgets to be flat over last year, but expects the business environment to improve gradually. While the improvement in IT spending outlook for CY2014 bodes well for FY2015E in terms of revenue outlook for the sector in general and for Infosys in specific, we believe Infosys will continue to lag behind its tier-I peers such as TCS and HCL Technologies (HCL Tech) on the revenue growth front. Over FY2013-15E, we expect Infosys' USD and INR revenue to grow at a CAGR of 12.1% and 19.5%, respectively. The current set of results as well as the given guidance are largely in line with our expectations and factored in the company's stock price, which limits a sharp upside potential in the immediate future. We value the stock at 17.5x FY2015E EPS of Rs. 213.3, which gives us a target price of Rs. 3,730. We recommend an Accumulate rating on the stock.

Source : Equity Bulls

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