Angel Broking recommends Neutral on Infosys

Infosys indicated that it has continued to see weakness in client spending throughout the current quarter ending March 31, 2014, (4QFY2014) and it may only be able to meet the lower end of its annual revenue growth guidance. Earlier this year, in January, Infosys had forecast a revenue growth of 11.5-12.0% for FY2014. The Management indicated that at the broad level some of the clients have seen slowdown in their businesses; these are across various verticals, leading to unanticipated project ramp downs and cancellations in 4QFY2014. In addition, the factors that hurt client sentiments in 4QFY2014 might impact the company's revenues in 1HFY2015.

Headwinds affecting growth: The Management indicated that factors such as: a) slowdown in spending by customers in Hi-tech and Retail & CPG verticals, b) random project cancellations and, c) skill mismatches are contributing to the sluggish revenue outlook for CY2014. As per the company, clients in financial services are investing more into regulatory compliance and risk-related initiatives, where Infosys has strong capabilities. However, Hi-tech, which is the largest sub-segment within the manufacturing segment of Infosys, continues to see headwinds. In Hi-tech, the Management believes that fall in PC sales and reduction in overall capex is likely to negatively impact spending in CY2014. Spending in the Retail & CPG vertical is also likely to be muted due to a) aggressive promotions and discounting in the holiday season putting pressure on the bottom-lines and this is likely to impact CY2014 spends, b) sluggish emerging markets business impacting retailers, c) specific business issues in some clients impacting spending plans, and d) harsh winter impacting retailers.

Challenges for company: The company saw attrition at the top management level of 9 employees during 2HCY2013. This could likely impact the company's performance adversely in the near-term. With an optimistic IT spending environment, if TCS guides for a front-ended growth which it consistently has been doing (and since 1Q and 2Q are seasonally strong quarters for Indian IT companies), Infosys stock is expected to see some correction in the short-term. The performance over the past couple of year does suggest some company-specific challenges for Infosys.

Outlook: We have revised our USD revenue growth estimate for Infosys to 11.5% for FY2014. We cut Infosys' FY2014E and FY2015E EPS estimates by 1.5% and 2% respectively. We now expect Infosys to deliver a 10.5% yoy USD revenue growth in FY2015E. We revise our target price downwards from Rs. 3,650 to Rs. 3,570. We maintain our Neutral rating on the stock.

Source : Equity Bulls

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