Infosys looks a strong buy ahead of Q2 results

NEW DELHI: Infosys, which is scheduled to announce its second-quarter earnings on Friday, has surged by as much as 20 per cent since July, buoyed by renewed optimism after the IT major left FY14 sales growth guidance in dollar terms unchanged at 6-10 per cent.

However, looking at the trend after the initial bump-up, the stock has largely remained flat in the past one month. The stock rose merely 2 per cent since August, as compared to over 14 per cent rally in Tata Consultancy Services (TCS) and 18 per cent surge in HCL Technologies.

This raises further questions in investors’ minds: should one book profit in Infosys or buy on dips ahead of Q2 results?

The Infosys stock has barely participated in the recent rally of IT stocks. The recent high-profile exits and questionable reorganization decisions could be possible reasons, say analysts.
However, they don’t recommend a ‘sell’ on the stock and expect further rally in the near term.

“We appreciate the recent overall changes, especially cost rationalization, essential to drive competitiveness in traditional services,” Kotak Institutional Equities said in a note.

“Recent strong large deal wins offer comfort regarding near-term growth. Consensus earnings are conservative and will likely be upgraded. Valuations are undemanding and make Infosys one of the few stocks that can deliver reasonable absolute returns,” added the note.

The brokerage firm has an 'add' rating on Infosys and expects the stock to hit Rs 3,400 levels in the next 12 months. At 14.3X FY2015E earnings, the stock implies modest revenue CAGR of 11% for six years, 4% growth to perpetuity and RoE of 30%. Kotak finds the stock attractive and would recommend buying it at current levels.

Technology stocks have been in an uptrend so far in 2013, supported by the depreciation in the rupee and signs of steady recovery in developed economies like the US and those in Europe.

The BSE IT index has rallied a little over 42 per cent as compared to 2.4 per cent gain in the BSE Sensex so far in 2013, as of data collected on October 7.

After posting strong earnings growth in the quarter ended June 30, analysts expect the trend to continue in the second quarter as well. The positive impact of rupee depreciation on earnings is expected to be witnessed in the next quarter as well.

The rupee fell 10-11 per cent on an average against the dollar, euro and pound during the September quarter compared with the previous quarter. A 1% drop boosts operating margins of top exporters by over 30-35 basis points. However, the extent of benefit depends on how well companies are able to restrict losses on account of foreign exchange hedging.

BNP Paribas upgraded Infosys Ltd to "buy" from "hold" and has also raised its target price to Rs 3,550 from Rs 2,450 ahead of the company's September-quarter earnings.

"Despite Infosys's recent struggles, the global brokerage firm believes that an uptick in demand, renewed focus on traditional service lines will result in revenue growth stabilising which may even lead to stock getting re-rated in the near term," BNP said in a note.

BNP adds there is improvement in the core markets of Infosys and it may raise its FY14 dollar revenue growth guidance in second-quarter results.