Published on 17/07/2017 11:55:02 AM | Source: Sharekhan
Hold Infosys Ltd For Target Rs.1,050.00 - Sharekhan
* Good Quarter:
Infosys reported higher-thanexpected earnings for Q1FY18 after posting lackluster performances in the past consecutive quarters. For Q1FY18, constant currency (CC) revenue up by 2.7% on a sequential basis and 3.2% on reported basis to $2651 mn, led by volume growth of 1.7% coupled with improvement in realizations (1.8%QoQ), the topline growth was largely attributed to an uptick in BFSI, Retail and Energy verticals. EBIT margin contracted by 53BPS on a sequential basis at 24.1% (above our estimates), owing to rupee appreciation (80BPS), increase in subcontracting expenses (up 6% QoQ) and higher pay variables, partially offset by operational efficiencies (improved utilization, positive impact of 90BPS), improvement in realisations and cross-currency tailwinds (20BPS). The net profit for the quarter declined by 3.3% QoQ to Rs3,483 crore.
* Retained guidance, hopes pinned on H2FY18 growth picks up in BFSI:
Infosys has retained its revenues guidance of 6.5-8.5% on CC basis for FY2018. However, management commentary suggests that growth is likely to be back ended and is largely dependent on expectations of a pick up in the growth of BFSI (its largest vertical) in H2FY18. We however, see a downside risk to the execution of the upper end of current guidance. This is based on the fact that H2 is seasonally weaker for IT majors and also the fact that the management commentary of Infosys (that expects a pick up in the growth) is starkly different as compared to TCS (continues to witness stress) in the BFSI vertical. This is clearly suggestive of an absence of secular demand revival in the BFSI sector. Although there is a possibility of a revival in the BFSI growth, given a rising interest rate environment in US and Europe/UK withstanding the Brexit verdict, large deals flows and a secular upward movement in the sector is still looks difficult in near to medium term.
* Valuation: Maintain Hold with PT of Rs1050:
We have tweaked our earnings estimates on account of a currency reset USD/INR currency to Rs64.5 for FY18/19E. Looking at the valuation, the stock is down 18% odd in last one year. The earnings multiple at 14x FY19 is already factoring a weak growth profile over FY17-19E. This along with the expectation of one time big dividend or buyback (the management committed to return Rs. 13000 crores to shareholders in FY2018 and to pay 70% of free cash flows in the coming years) will support any major downside in near to medium term. However, absence of growth trigger and increasing regulatory fear in the US will restrict stock re-rating. We maintain our HOLD rating on the stock with unchanged price target of Rs1050.
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