Infosys> Rating: Hold - Nothing has changed
In the long-term, despite a supportive valuation, we are worried about market share loss, dwindling growth in traditional services, inferior positioning in the new growth market (Continental Europe) and reduced focus on less than-$50-million clients. Thus, we retain our Hold rating with a target price of R2,350.
We value Indian IT services firms on a price-to-earnings (P/E) basis relative to their historical trading range, compared with both peers and growth rates. We value Infosys at 15x FY13e (estimates). We believe the multiple is justified since the company should report an earnings CAGR (compound annual growth rate) of 12.5% over FY13-15e, and is better positioned than in 2003 on such key factors as revenue size, net worth, dependence on the US, and client concentration. Given the muted earnings growth in FY13e, we have a price-to-earnings growth ratio of 1.2.
Drop in discretionary spending continues to impact growth: There has been no change in the business outlook since the June quarter. While greater exposure to discretionary spending and negative operating leverage are likely to hurt revenue growth and margins in the near term, the significant rupee depreciation more than offsets the impact of these headwinds. For the long-term, we believe that the company is
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