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You are here : IndiaNotes >> Research & Analysis >> Companies >> Infosys Ltd. >> Research

Pick of the Week: Buy Infosys at CMP and add on declines to Rs 942- Rs 954 band

HDFC Sec | 26 Dec, 2017  | Follow Author | Add to my Favourites 
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Infosys is a global leader in technology services and consulting and enables clients in 45 countries to create and execute strategies for their digital transformation. Infosys is engaged in consulting, technology, outsourcing and next-generation services. The Company, along with its subsidiaries, provides business information technology services comprising application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management. It provides its products and business platforms and solutions to accelerate intellectual property-led innovation, including Finacle, its banking solution, and offerings in the areas of Analytics, Cloud and Digital Transformation. As on 30th Sept 2017, Infosys has 198440 employees from 127 nations and 1173 clients.


Investment Rationale:


- Induction of new CEO and MD could address the problem of competence and cultural fit;


- Cost optimization initiatives could help improve its profitability;


- Infosys’s Client Centric approach could help to increase clientele going forward;


- Strength seen in BFSI could help generate more revenue;


- Renew and new offerings could derive incremental revenue opportunity going forward;


Concerns:


-  Senior level attrition could impact its growth strategy;


-  Recovery delay could result in a loss of revenue growth momentum;


- Competition, Decline in large orders;


- INR appreciation against the USD.


View and Valuation: Infosys seems to have managed succession planning well post exit of Vishal Sikka. Investments made by Infosys in digital transformation, analytics, cloud, cyber security and AI would help the company to serve emerging demands of clients in these areas. Infosys has been struggling to grow even in high single digits as the global IT services market sees a tectonic shift from IT outsourcing to digital, cloud, artificial intelligence and automation. Infosys has seen a number of high-profile exits of late even as its bets on innovation and higher-value offerings are yet to pay off. Now, appointment of new CEO and MD Mr Salil Parekh and of the new founder member (Nandan Nilekani) as a Chairman & Non Executive Non Independent Director could lead the company to better days of non-turbulent growth going forward.


Infosys scores ahead of its large cap IT Peers like Wipro, HCL Tech etc in next gen tech services like IoT, block chain, cyber security etc being an early adopter and having higher exposure to BFSI and Manufacturing which will adapt to these fast.


The company has not been underperforming its peers on the front of revenue growth and profitability, but its valuation to peers remains discounted amid the leadership mismatch and concerns around Governance. Under new leadership, gradual recovery on growth to normalcy could provide further case of rerating going forward. Further timely shift by the management towards newer areas of growth could reverse the topline growth slowdown. The incoming CEO could bring fresh thrust and direction to the business growth of Infosys though we are yet to hear from him in the matter. The current undemanding valuation (despite improving capital allocation, operational efficiency and business longevity) leaves scope for modest appreciation over the next few quarters.


We feel investors could buy the stock at the CMP and add on dips to Rs. 942-954 band (~13.0x FY20E EPS) for sequential targets of Rs 1167 (16.0x FY20E EPS) and Rs 1258 (17.25x FY20E EPS). At the CMP of Rs 1039 the stock trades at 14.25x FY20E EPS.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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