Street cheers Infosys Q3 nos, audit-all clear; experts see up to 22% upside - Business Standard
13-Jan-2020 10:13:09 AM
Buoyed by a positive troika of increase in revenue guidance, attrition decline, and audit panel's clean chit on whistleblower allegations, shares of Infosys surged over 4 per cent in the early deals on Monday and was the top gainer on the 30-share Sensex index.
On Friday, the IT bellwether said that its audit committee found no evidence of financial impropriety or executive misconduct by the company in its investigation into allegations contained in the anonymous whistleblower complaints the company disclosed on October 21, 2019 and determined that the allegations were substantially without merit. The whistleblower allegation was the key overhang on the stock valuations; hence, a clean chit by the audit committee following a comprehensive investigation across parameters is a key positive, say analysts.
At 10:00 am, the stock was trading over 4 per cent higher at Rs 768.90 apiece on the BSE. It hit a high of Rs 769.80 during the session. In comparison, the benchmark S&P BSE Sensex was ruling at 41,821 levels, up 221 points or 0.53 per cent.
For the December quarter, the numbers were broadly in line with analysts' expectations with reported revenue and net profit growth higher by two per cent and 10.6 per cent sequentially. Even in constant currency (CC) terms, Infosys sequential revenue growth of 1 per cent in Q3, was at par with the analysts expectations of 0.9-2 per cent. However, EBIT margin of 21.9 per cent marginally missed street estimates of 22.3 per cent.
As expected, the financial services vertical (31-32 per cent of revenues) grew at a moderate pace in Q3. But, better growth by other verticals such as retail, communication, life science, hi-tech, among others, helped Infosys. Digital business rose by a sharp 40.8 per cent, year-on-year in CC terms. As per the management, continued softness in European banking space hurt its financial services segment and the pressure would continue for some more quarters and retail segment would remain volatile. READ MORE
One of the key positives was the increase in FY20 revenue guidance to 10-10.5 per cent from 9-10 per cent. That apart, large deal wins to the tune of $1.8 billion also bode well for the company. Maintaining 'buy' rating on the stock with the target price of Rs 865 apiece, global brokerage firm Citi, as per reports, said increase in revenue guidance and investigation outcome are positive developments. "Infosys continues to execute well and deal wins provide visibility. We expect Infosys to continue to grow faster than peers," the brokerage said.
Goldman Sachs; however, expects key industry verticals like BFSI and Retail to see slowdown. It has 'neutral' rating on the stock with the target price of Rs 718. UBS too has maintained 'neutral' rating on the stock with the target price of Rs 900. It said Infosys has given a positive start with guidance raise and investigation outcome should be well received by market.
Morgan Stanley said Q3 results were in-line with estimates. It has maintained "Equal-Weight" on the stock with the target price of Rs 805 per share.
WHAT DOMESTIC BROKERAGES SAY
Infosys is currently trading at 17X/15.5X FY21E/FY22E multiple which is nearly 28 per cent discount to TCS multiples, said analysts at Prabhudas Lilladher. "With the clean chit, strong deal pipeline and margin improvement levers we expect the discount to narrow to 20 per cent. With the modest miss on revenues in Q3 and steady headwinds of BFSI/Retail ahead, we have marginally tuned our estimates and continue to value Infosys at 18X multiple at earnings of Rs 45.5 (Sep-20) to arrive at a changed target price of Rs 820. Infosys remains our top pick in tier-1 IT companies," the brokerage added.
HDFC Securities lists four factors behind its positive stance on the stock. They are as below -
Greater focus on large deals (56% YoY in 9MFY20 TCV on S&M velocity, partnerships);
Pricing lever in digital (highest digital growth in tier-1 IT);
Completion of accelerated investment phase and multiple levers to keep margin steady; and
Improving supply metrics (declining attrition, stable sub-contracting).
The brokerage expects US dollar revenue/EPS CAGR of 10/12 per cent over FY20-22E factoring US dollar revenue growth at 9.6/9.8/9.8 per cent and EBIT per cent at 21.6/21.9/22.1 per cent for FY20/21/22E. "Risk-reward favourable with Infosys' valuations at nearly 30 per cent discount (peak) to TCS," it added.