Infosys Ltd - Hits the nail on the head - ICICIdirect.com

Infosys reported an in-line Q3 but the key highlight was its earning commentary - as simple and succinct as it could be. The company emphasized its single minded and "more than-ever-before" focus on reviving growth and is working on three strategic initiatives - sales effectiveness, delivery effectiveness and cost optimisation - to drive industry leading growth and margins. Overall restructuring seems to be paying off, despite c-level exits, and suggests growth could accelerate - along with margin expansion - going into FY15E. That said, reasonable valuations dictate our HOLD rating and we would be buyers in sell-offs.

Key earnings call takeaways

CY14E budgets could be flat and could conclude in-time. Budget outlay could be stable with uptick in discretionary budgets. Cost optimisation still a priority. Pipeline is healthy but pricing pressure on large outsourcing deals and commoditized services continues. Among verticals, budgets could be flat to positive in financial services and insurance (FSI), automotive, commercial aerospace, industrial manufacturing, retail, CPG, energy and utilities, while they could be flat to negative for telecom, life sciences, defence, media & hi-tech (pc related). Wage cycle could revert to mean i.e. starting April 1 while EBIT margins could range 25% in the medium term. FY14E guidance raised to 11.5%-12% (12.4-12.9% in constant currency) vs. 9-10% earlier and implies a sequential growth of -0.4% to 1.4% in Q4 - very conservative in our belief.

P/E multiple mean reversion likely as margin concerns alleviating

We estimate Infosys to report revenue, EPS CAGR of 18.5%, 15.1% over FY13-FY15E (with average 24.7% EBIT margins in FY14-15E), slower than 19.3%, 14.1% reported during FY08-13 along with average 28.7% margins. However, with margin concerns alleviating and growth profile nearing industry average, we believe, P/E multiples could revert to their mean. Consequently, we value the stock at 17.5x (is in-line with its five-year average) FY15E estimate of Rs. 215 and maintain our HOLD rating. However, we reiterate that growth and margins could accelerate going into FY15E and sharp sell-offs could be used to accumulate the stock.

Source : Equity Bulls

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