Recent commentary indicating stability has failed to enthuse on a backdrop of poor FY17 and industry risks. Stock continued to search for next catalysts even as news on possible promoter stake sale and pricing pressure have dominated sentiment. Company has executed well with growth in line with peer group, with FY17 miss also a function of poor forecasting. 1H strength and details of $2bn cash return could be positive triggers, remains top sector pick.
Guidance reiterated, BFSI positive, retail to remain under pressure
In its recent comments, Infosys reiterated its FY18E guidance on revenue growth and margins. While BFSI growth has not picked up yet, outlook remains positive on the back of increasing interest rates in US and a benign regulatory environment. In contrast, retail will likely remain volatile on the increasing influence of online retailers and their negative impact on conventional retailers. Historical seasonality will be seen in FY18E, with 1H stronger than 2H.
Recent news has raised concerns
For Infosys, news on promoters potentially selling stakes and pricing pressure have added to the negative sentiment. The promoter group together holds 12.75% and despite the denial this will remain an overhang. However, the commentary on pricing pressure is not new or incremental, and in line with what Infosys has been saying for the past couple of years. The company has clarified that it is not seeing any pressure on rate cards and that clients asking for a 20-30% cost takeout over 3-5 year duration of the contract has been the norm over the past few years during renewal.
A good quarter and contours of $2 bn cash return plan would help
1H is seasonally strong and a good quarter could be a positive catalyst for the stock. The company will also lay out details of the $2bn cash return to shareholders (5.9% of the current MCap) which we believe could be a positive. In addition, the company also has a 3.3% dividend yield based on regular payout. Expectations of 7-8% revenue growth for FY18E are well set and carry low probability of further disappointments, in our view.
Our 12M PT of `1,100 is based on 15x multiple applied to FY19E EPS. Revenue guidance has set growth expectations with Infosys being best placed of digital vs peers, in our view. This is evident from growth of new tech subsidiaries. Maintain Buy. Risks. Weak macro, higher competition, stronger INR.
Revenue growth slowdown in FY17, disappointment also a function of poor forecasting
After a strong recovery of revenue growth in FY16, growth slumped again in FY17 due to a host of factors, Infosys delivering +7.4% y-o-y $ revenue growth in FY17 vs guidance of 11.8-13.8% y-o-y. We believe that the disappointment in FY17 was also a function of poor forecasting at the beginning of the year, even as actual growth for Infosys has been higher than TCS for the last two years.
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Key subsidiary financials – new technology turning profitable
Infosys’ CEO in his opening remarks in the FY17 annual report stated that revenue from software related services including Infosys Nia, Edge, Panaya and Skava grew 42% y-o-y in FY17. A look at subsidiary financials of the company suggests that growth has indeed been strong at these companies with the exception of consulting divisions. In fact, Edge, Skava, Panaya, Kallidus combined grew 49% y-o-y in FY17 and turned profitable.