We are downgrading Infosys to Neutral, as the recent stock move (up 25% since June vs. 12.5% for Nifty) has more than discounted the potential turnaround in top-line growth and recovery in revenue market share. While Dr. Sikkas appointment in June has removed the CEO transition overhang, we think near-term challenges remain. Our TP (target price) remains R3,700 as 4% earnings cut almost offsets the roll forward to Mar-16 vs. Sep-15. Interestingly, our bull and bear case analysis presents 20% swings either way from the current stock price.
Infosys has consistently been lagging its peers in winning infrastructure deals. Unlike peers like HCL Technologies, Infosys has not been actively pursuing the industry consultants to demonstrate its capabilities. With the growing importance of the infrastructure verticals fuelled by a shift towards simplification and integration of IT networks, Infosys has taken a course correction. Our checks suggest that Infosys has been a lot more proactive in engaging with the consultants to assuage their concerns. The company is now actively investing in developing the vertical.
With the advent of Infosys 3.0, the company tried to divert its attention to non linear growth, hence reducing the focus on the bread and butter ADM (application development and maintenance) vertical. In the last few years, the difference between TCS and Infosyss ADM growth has steadily increased from 4% in FY11 to 7% in FY14. With the return of Narayan Murthy, Infosys did a course correction with a renewed push into the ADM services, but we are yet to see it translating into tangible results. Considering that the ADM still makes 35% of Infosyss revenue, we see Infosyss refocus on the service line as positive.
Infosys has been struggling to sufficiently churn its existing client base. The y-o-y revenue growth on per client basis has steadily come down from 23% in FY11 to about 8% in the past two financial years. Getting repeat business from the existing client base is low hanging fruit for the sector and we see their continued inability to farm the existing clients as a negative.
Infosys has a higher share of discretionary spending at 37% vs 22% for TCS. We believe that Infosyss pursuit of discretionary wallet has been behind its revenue slowdown. But, for the past few quarters, it seems to be going back to the basics and has been concentrating on the non-discretionary part of the revenue pie to drive growth. Infosys has been consistent in terms of the number of new clients added, adding close to 6-8% of new clients every quarter. However new clients typically give smaller orders as the relationship lacks the trust needed for larger, firm-wide deals.