Infosys: BUY

K Venkatasubramanian BL Research Bureau | Updated on October 19, 2014

Healthy client additions, growth in application services business are key positives

After considerable churn in its senior management over the past few years, IT major Infosys has finally settled down with a new non-promoter CEO at the helm.

The company has been witnessing a steady return to the growth track over the past few quarters. In fact, in 2013-14, the company’s revenue growth almost matched the lower end of the industry’s growth rate (12 per cent in dollar terms) after falling behind in many of the previous financial years.

Mining new clients

Apart from expanding its ‘bread and butter’ application services offering, the new CEO looks set to provide a fillip to the products business, while carefully investing in sales and marketing to mine new clients.

Investors with a two-year horizon can buy Infosys shares. Healthy client addition, growth in the application services business, steady traction from Europe as well as North America, and robust improvement in utilisation rates are the key positives for the company.

At ₹3,854, the stock trades at 16 times its likely per-share earnings for FY16. This is at a discount to its historical average of 17-20 times over the past few years. The valuation multiple is also substantially lower than what industry leader TCS commands. Thus, longer term investors can buy the stock at these levels.

In the first half of 2014-15, Infosys’ revenues grew 7.8 per cent over the same period in 2013-14, to ₹26,112 crore, while net profits rose 25.1 per cent to ₹5,982 crore.

The company’s business IT services segment, which accounts for 63 per cent of revenues, has grown at a healthy pace in the last one year, with considerable traction in application, infrastructure and testing services. While its high-margin package implementation and consulting business grew at a slow rate, Infosys has nonetheless been able to tap discretionary spends of clients.

Manufacturing, energy and utilities, and telecom were segments that have done well and led growth for the company. Verticals such as BFSI and retail and life-sciences too grew, albeit at a slow pace. Thus, the company has been able to have broad-based growth across verticals and service lines.

The slowing economic condition in Europe doesn’t appear to have had any effect on the company as it has seen an enhanced contribution from the geography, at 24.8 per cent, even in the recent quarter. North America, although a tad weak compared to Europe, has nonetheless seen steady growth. Infosys added three clients each in the $50 million and $75 million bands, and six in the $25 million category.

Attrition, at over 20 per cent, continues to rise and is a key risk. Any interim wage hikes to stem the flow may affect margins.

Published on October 19, 2014

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