Morgan Stanley remains 'overweight' on Infosys

Increased stock price volatility has made investing in Infosys riskier, said Morgan Stanley in its report on Monday. However, the leading foreign brokerage maintained its ‘Overweight’ rating on India’s second biggest software exporter with a target price of Rs 2,890.

Lack of hiring, cost outlook have increased uncertainty on FY14e earnings, but this can be addressed by stronger execution and tighter cost control.

Infosys stock is now trading at 12x FY14e EPS, which is towards the lower end of its historical trading range. “We believe that regardless of the revenue growth outlook in FY14e, normalisation of the cost structure and stronger management execution will be key for the stock to deliver sustainable returns,” said Morgan Stanley.

Over the next three months, the stock could continue to languish. It is tempting to move to the sidelines when the stock gets so volatile. Management’s reluctance to address cost structure issues for FY14e and outline corrective measures have increased the volatility.

Over the last 10 years’ trading history, such volatile moves in the stock have bottomed around trough valuations of ~12x 1-yr forward EPS.