Buy stocks of Infosys; target of Rs 2630

“Infys’s June’12 qtr performance missed exp with co reporting a 1.1% QoQ decline in US$ terms at US$ 1,752 mn and margins declining by ~200 bps QoQ to 30.6% despite ~10% currency depreciation impacted adversely by ~3.7% QoQ decline in revenue productivity (3.1% QoQ in constant currency terms, with co attributing the decline to change in business mix with some sporadic pricing resets in BFSI) and ~US$ 15 mn of revenue reversal on account of a project cancellation. Profits at Rs 22.9 bn (-1.2% QoQ) missed expectations driven largely by op performance miss. Amongst geographies, North America led growth with Top 5/10 clients growing by 4%/2.6% QoQ, highest in 3 qtrs. A 2.8% QoQ vol growth in the qtr along with growth in top 5/10 clients in our view are the encouraging points in an otherwise below par performance by the company during the qtr and could be indicative of both (1) some pricing pressure in the sector (most evident in BFSI, with fin services op margins down by ~300 bps QoQ) as well as (2) co now becoming relatively more flexible on pricing/margins in the past ( albeit will have to wait for more confirmations on the front)”

“Infosys pared down it’s FY13 revenue outlook to ‘atleast 5% rev growth to US$ 7.34 bn’ V/s an 8-10% YoY growth outlook earlier (we expected the guidance to be revised to 6.5- 8.5% YoY growth) with cross currency moves contributing to ~150-200 bps cut in the guidance. The revised guidance implies a 3% CQGR through Q2-Q4FY13. Surprisingly, Infy has not provided any outlook for Sep’12 qtr citing macro uncertainty while remaining confident of it’s FY13 outlook, however continuous misses on quarterly performance in the recent past will limit the street from giving the benefit of doubt to the company.”

“We moderate our revenue estimates and now build in a 4.8%/10% US$ revenue estimates (V/s 8.8%/11% earlier), however lower currency resets limit any earnings cuts. Valuations at ~14x/13x FY13/14E P/E and 5%+ FCF yield will limit sharp downsides from current levels , however an pick up in operational performance (especially after a near continuous streak of disappointments) will need to preclude strong stock upsides. ACCUMULATE, TP cut to Rs 2,630 (V/s Rs 2,800 earlier),” says Emkay Global Financial Services research report.