We maintain ‘buy’ on Infosys with a price target of Rs 4,485. In the near term, we expect a demand revival and increased cost efficiency to drive earnings upside. We base our price target on 19.5x FY15e PE.
We believe that Infosys’ cost-efficiency initiatives could yield margin savings of 300-400 bps in the next few quarters. At our revenue forecast of 14.5% y-o-y in dollar terms, this should give Infosys room to offer 8-10% wage hikes offshore and still report an Ebit margin of 26% (versus 25% in Q3 of FY14).
The company recently stated its intent to operate at industry-leading profitability, but we hope it does not compromise investments in client-facing activities and employee incentives to curb attrition. Infosys is currently under-invested in new growth segments like infrastructure services and BPO, and investing for growth in these segments is necessary for long-term growth.
Reports suggest that Infosys is mulling offshore wage hikes of 5-7% for FY15, to be effective April 2014. Our channel checks suggest that many employees expect wage hikes of at least 8-10%, and a 5-7% average may be below expectations. Employee attrition remains high ahead of seasonal peak for exits. Reported attrition in Q3FY14 touched a high of 18.1% on a last 12-months basis, and quarterly annualised attrition remains high at 21.4%. We are concerned that lower-than-expected wage hikes could result in abnormally high attrition in H1 FY15, impacting revenue acceleration. We view this as a risk to our cyclical recovery assumptions.