Analyst corner: Maintain ‘add’ on Infosys with target price of Rs 1,405

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New Delhi | Published: July 17, 2018 3:02:35 AM

Infosys reported a broadly in-line Q1FY19 on both revenues and margins.

Infosys reported a broadly in-line Q1FY19 on both revenues and margins.

Infosys reported a broadly in-line Q1FY19 on both revenues and margins. Revenue decline in the financial services vertical of 0.2% QoQ in CC terms and high attrition of 23% on a Quarterly Annualized (QA) basis were the key negatives. However, 8% QoQ growth in CC terms in digital revenues, $1.12bn of deal TCV (vs $905mn in Q4FY18) and addition of 4 clients in the >$100 mn revenue bucket were the key positive highlights. Attrition was elevated even for high performers which is concerning especially given their importance for ensuring superior delivery quality and solutioning and for sustaining CSAT levels.

Spends are expected to recover in the financial services vertical from Q2FY19 itself with the vertical contributing 40% of deal TCV in the quarter. Though Infosys primarily runs a “land and expand” model not reliant on large deals beyond a point, a strong large deal TCV does provide comfort that the strategic imperatives are working and driving the company in the right direction.

We leave our EPS estimate for FY19/FY20 as broadly unchanged given in-line results and commentary. Maintain ADD with a target price of Rs 1,405 based on 18x FY20E EPS. Improvement in financial services execution and alleviation of attrition levels would be the key catalysts.

BFSI revenues declined by 0.2% QoQ in CC terms (vs 3.7% growth for TCS) with Europe being specifically weak driven by project cancellations and push-outs at a specific client. Insourcing had an impact on growth in the quarter as well. Higher client concentration and larger proportion of transformational projects exacerbate the challenges in precise quarterly forecasting of revenues in the vertical.

Management is hopeful that the issues in Europe should resolve in Q2FY19 with demand seeing a healthy recovery in the Americas after many quarters.

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