Banks on IT services, outsourcing

Infosys, the laggard in the last two years, has bounced back in FY14 as its founder returned and pushed all the right operational buttons. With a steady improvement in the company’s numbers, the time is right for investors with a two-year horizon to buy the company’s shares.

At ₹3,190, the share trades at 15 times its likely per-share earnings for FY15. This is cheap considering its historic valuations (18-20 times), and makes the Infosys stock an attractive investment option. This multiple is also lower than that of its peers, such as TCS, HCL Tech and Wipro.

Healthy client additions, growth in its high-margin services, steady traction from Europe, and improvement in utilisation rates are the key positives for the company.

In FY14, Infosys’ revenues grew 24.2 per cent over the previous fiscal to ₹50,133 crore, while net profits rose 13 per cent to ₹10,648 crore.

With prospects for the IT services and outsourcing industry set to improve significantly in FY15, going by the views of most top-tier players as well as industry analysts, Infosys’ growth rates are also likely to improve.

Business positives

Over the last year, Infosys added one customer in the $300-million category and one in the $100-million bucket. It added 10 clients in the $50-80 million category.

Key segments such as manufacturing and retail grew at a faster pace than the company’s overall revenue rate. The banking, financial services and insurance (BFSI) segment also grew, albeit at a slower pace. Thus, the company’s growth was fairly broad-based.

The high-margin consulting and package implementation service accounted for 33.2 per cent of the revenues, up a couple of percentage points from the previous fiscal. Infosys has been able to tap the discretionary spends of clients quite well.

The management has indicated that it will renew its focus on the ‘bread and butter’ application services business this fiscal .

While North America’s contribution to Infosys’ growth has not been significant, Europe has compensated for this with a robust show.

The company’s guidance of 7-9 per cent growth in FY15 in dollar terms may be quite conservative. In a difficult FY14, Infosys managed to deliver 11.5 per cent growth in dollar terms, just a little short of the industry growth rate.

Infosys’ attrition rate (18.7 per cent) has been steadily rising. Any mid-term salary increases to stem this tide may affect margins .

(This article was published on April 20, 2014)
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