Infosys third quarter earnings surprised the Street on Friday leading to a 17 per cent spike in its shares. The sharp jump added over $4 billion to India's second largest IT major's market capitalization.
Investors aggressively bought Infosys shares on account of the following.
1) The Street had anticipated a downward revision in revenue forecast for the current fiscal (2012-13) after cautious commentary by the management in early December. Most brokerages expected Infosys to cut its FY13 organic revenue forecast to as low as 3.5 per cent from 5 per cent. But Infosys not only retained its full year forecast, but upped the same to 6.6 per cent after factoring in Lodestone's revenues. Infosys had acquired the Swiss consultancy last year. The upgrade in guidance came after six quarters.
2) This was the first revenue beat after two years of negative surprise.
3) Pricing increased sequentially (quarter-on-quarter) after three quarters of decline.
4) Quarterly earnings indicated strategy of higher flexibility to get new deals.
Brokerages turned optimistic and there's likelihood of further upside in Infosys shares.
JPMorgan has upgraded Infosys to "overweight" with a target of Rs 3,100. The global brokerage has also upped its FY14 earnings per share forecast to Rs 178.36 post the announcement of third quarter earnings.
CLSA and Barclays have also upgraded their targets on Infosys to Rs 3,100 and Rs 3,020 respectively. Bank of America Merrill Lynch has upgraded Infosys to "buy" with a target of Rs 2,950.
The spate of upgrades indicates that there might be more headroom for Infosys shares. However, with the sharp rise in Infosys shares, its valuation gap with other peers, especially TCS, has narrowed down considerably.
Infosys now trades at 15.6-times FY14 earnings estimates while TCS trades at 17.1 times.
"After Friday's stock reaction, Infosys valuation discount to TCS is down to 8 per cent, covering most of the arbitrage opportunity. Further upside will be at best in line with the sector performance and contingent on discretionary spending pick-up," HSBC said.
Here's what global brokerages say on Infosys third quarter earnings.
Morgan Stanley: We see light at the end of tunnel and for a change it is not a train. The 15 per cent move is just the beginning in our view and Infosys stock remains a high conviction overweight for us.
Standard Chartered: Our price target moves to Rs 2,630 from Rs 2,400, which implies 15-times FY'14 expected EPS, in line with current levels. We believe that the sharp 17 per cent post-result single-day rally resets the valuation gap versus TCS.
Credit Suisse: Its relative valuations to TCS and HCL Tech are a lot less attractive, and preference remains with these two stocks. We maintain our neutral rating on Infosys. The one upside risk to highlight is technical-any large underweight position among benchmarked funds could be covered and help the stock in the near term.
Citigroup: We believe Q3 is the first big step for re-rating of Infosys. With US elections and fiscal cliff issues behind us and sentiment improving, we believe that possibility of an uptick in IT spends remains high, which could result in further earnings upgrades.