We maintain ?neutral? rating on Infosys with a target price of R2,300. We value Infosys at 13x one-year rolling-forward earnings of R176, which is a 35% discount to its long-term average valuation. We believe the discount is justified on an expected reset in growth premiums in valuation given slower-than-peer group growth and softness in demand.
We continue to expect Infosys to miss its FY13f revenue growth guidance of 5% as we build growth of 4.4% on an organic basis and ebit margins of 26.6% (lower than guidance of 27%). The company had guided for 5% growth in FY13f, based on 85% visibility in Q2FY13f, which meant there was visibility for $3.3 billion out of the $3.8 billion revenues required for H2FY13f. While management sees the 85% as largely on track, for the 15% visibility gap it is seeing issues. In this scenario, management indicated that guidance achievement is contingent on business acceleration in Q4FY13.
Infosys? guidance on margins for H2FY13f implied a similar margin as in H1FY13 of 27% EBIT, despite wage hike impacts and currency appreciation impacts (guidance at USD-INR rate of 53), which were likely to be offset by growth acceleration, cost optimisation and utilisation improvements (from current levels of ~72% closer to targeted range of 76-80%).
Infosys? key focus over the next few quarters is to reduce the gap on growth versus industry and realign cost structure through utilisation improvements and other cost optimisation measures such as training optimisation and optimisation of its supply chain (with increased dependence on off-campus fresher hiring versus earlier dependence on campus hiring) so that hiring is aligned with demand. The company remains committed to the Infosys 3.0 strategy of moving up the value chain and believes the strategy remains relevant given the commoditiSation being seen across the bread and butter service lines.
Pricing is largely stable within existing relationships, but in new business the competitive intensity has increased given the soft demand. Lodestone acquisition is likely to be consolidated with Infosys from October end onwards and will contribute ~$40 million in revenues in Q3FY12f. Nomura