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Infosys a buy ahead of Q3 earnings: Espirito Santo

Global brokerage Espirito Santo has reiterated its "buy" call on Infosys (target Rs 2,650) ahead of the announcement of December quarter earnings. Infosys will announce its third quarter results on Friday. Espirito Santo had initiated a "buy" call on Infosys two quarter ago, but since then the stock has fallen 4.5 per cent.
Here are five reasons for the optimistic outlook on Infosys
  1. Infosys, which is struggling to achieve its 5 per cent sales outlook in the current fiscal, can grow by 9 per cent organically in FY14, Espirito Santo says. Infosys has achieved a 13 per cent year-on-year growth ex-BFSI (banking, financial services and insurance) and telecom on a TTM (trailing twelve months) basis, the broker age says and if its portfolio ex-BFSI and telecom grows by 16 per cent year-on-year, higher growth in 2013-14 is possible.
  2. Higher discretionary spending from SAP and Oracle services and traction from large deal wins will drive earnings growth, Espirito Santo says. Infosys has the biggest SAP and Oracle services portfolio versus peers.
  3. Lodestone will kick in higher than company average growth rates. Assuming 20 per cent growth for Lodestone alone contributes 2.2 per cent to overall growth rates, Espirito Santo says. Infosys had acquired the Swiss consultancy for 330 million Swiss francs in September 2011.
  4. Margins may improve as Infosys reduces hiring. Natural attrition will improve utilization rates in the near term and also improve onsite utilization, Espirito Santo says. We factor in a 30 basis points margin improvement in FY14 despite a 4 per cent currency appreciation, the broader said. Infosys has seen 660 basis points deterioration in EBIDTA (earnings before interest, depreciation, tax and amortization) margin in FY13 adjusted for the 14 per cent depreciation in the rupee.
  5. Focus on acquiring captives of existing clients in addition to products, platforms and the healthcare space could boost market share in existing clients and could take overall company growth rates higher than 11 per cent in FY14.

    Key risks: Infosys has been witnessing ramp-downs in the existing business.

    Disclaimer: Investors are advised to make their own assessment before acting on the information.

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