Sharekhan has a buy call on Infosys with a target price of Rs 840.
The current market price of Infosys is Rs 700.45.
Time period given by the brokerage is one year when Infosys price can reach the defined target.
Investment rationale by the brokerage-
Another quarter of robust revenue performance, strong deal TCVs: Infosys delivered yet another quarter of strong revenue growth in a seasonally weak quarter, beating street’s estimates during Q3FY2019. The company reported constant currency (CC) revenue growth of 2.7 per cent QoQ/10.1 per cent YoY (returned to double-digit growth after 10 quarters, though it includes 30 BPS incremental revenue from Fluido’s acquisition). Beat in CC revenue growth was primarily led by strong growth in financial services (3.6 per cent QoQ on CC), energy and utilities (7.4 per cent QoQ) and manufacturing (7.6 per cent QoQ). Europe (3.8 per cent QoQ) and North America (2.6 per cent QoQ) led the growth during the quarter. Digital revenue grew by 5 per cent QoQ on CC basis (31 per cent YoY on USD basis), while core services revenue growth accelerated to 1.8 per cent in Q3FY2019 (versus 0.5 per cent in Q2FY2019). Blended realisation declined marginally by 0.1 per cent QoQ during the quarter, while volumes grew by 2.6 per cent QoQ despite furloughs. On a reported basis, U.S. revenue increased by 2.2 per cent QoQ to $2,987 million, ahead of our estimates. Infosys won 14 large deals during the quarter, with TCVs of $1.57 billion (taking total deal TCVs of $4.7 billion in 9MFY2019), of which 30 per cent are net new TCVs.
Margins below estimates owing to accelerated investments: EBIT margin declined by 118 BPS QoQ to 22.6 per cent (lower than our estimates) despite rupee tailwind (+50 BPS) and operational efficiencies (+40 BPS), owing to lower utilisation (-80 BPS), catch-up in compensation (-30 BPS), increased sales investments (-30 BPS), acquisition impact (-20 BPS) and de-classification of Skava and Panaya (incurred additional depreciation expenses of $12 million during the quarter, an impact of negative 40 BPS). Management expects Q4FY2019E margin to be impacted by rupee appreciation, continued sales investments, targeted compensation correction and transition of large deals. Given the one-time expenses (declassification of Skava and Panaya resulted in Rs 451 crore of expenses), reported net income declined by 12 per cent QoQ to Rs 3,609 crore. Adjusting the one-time expenses, net profit during the quarter declined by 1.2 per cent QoQ, in line with our estimates.
Raised revenue growth guidance, retains margin guidance: With strong performance in 9MFY2019 (8.1 per cent YoY on CC basis), acceleration in deal wins and strong demand environment in select verticals, Infosys has increased CC revenue growth guidance to 8.5-9.0 per cent YoY (higher than our expectations) from 6-8 per cent. The upward revision of guidance indicates the signs of progress of its strategies. Infosys outlined investments of 100 BPS at the beginning of FY2019 into sales, digital competencies, localisation and employee reskilling; and now management does not see any incremental investments in these areas in the medium term. Management has retained its margin guidance band at 22-24 per cent, despite EBIT margin of 23.3 per cent in 9MFY2019. Margin is expected to remain under pressure in Q4FY2019 on account of continued investments.
Digital momentum to continue albeit flat client budget: Management mentioned that the client’s budget for CY2019 would be flat on a YoY basis. On the vertical front, BFSI is expected to continue its growth momentum on account of market share gains in top accounts, adoption of new technologies among large banking clients, ramp-up of large deals and new logo wins, though management indicated slowdown in buy-side firms owing to drop in AUM. Digital revenue is expected to maintain its strong momentum given robust demand for cloud, SaaS, digital studio, analytics and IoT. Given strong deal wins, strengthening relationships with large clients and continued digital momentum, we believe Infosys is well positioned to catch up with leaders on revenue growth in FY2020E.
Approved buyback of worth Rs 8,260 crore: Infosys announced buyback of Rs 8,260 crore (approximately $1.1 billion) under the open market route at a price of Rs 800 per share (a 17 per cent premium to the last closing price of Rs 684). Effectively, the company will buyback around 10.3 crore shares, represents 2.4 per cent of total outstanding shares. Along this share buyback, the company has announced a special dividend, which would result in payout of approximately Rs 2,107 crore ($302 million). Management had announced its intention of $2 billion additional payout in FY2019, of which $400 million has been paid as special dividend.
Maintain Buy with a target price of Rs 840: We have tweaked our earnings estimates for FY2019E/FY2020E/FY2021E, factoring in lower-than-expected margin that is being largely offset with increased revenue guidance in FY2019E and improving business visibility. At the CMP, the stock is trading at 16.4x/15.1x its FY2020/FY2021E earnings estimates. With robust TCV signings and improving business visibility, we believe Infosys is gradually catching up in revenue growth with TCS. Hence, we believe the discount with TCS will gradually reduce going forward. Thus, we maintain our Buy rating on the stock with an unchanged target price of Rs 840.
Source: Economic Times