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STOCK UPDATE Infosys
Recommendation: Buy
Price target: Rs4,000
Current market price: Rs3,358 Earnings warning dents sentiment, price target revised down to Rs4,000 Key points -
In a meeting of its investors on March 12, 2014 Infosys' management issued an earnings warning that the company may only achieve the lower end of the FY2014 guidance of an 11.5-12% growth. That is an implied revenue decline of 0.4% for Q4FY2014 and is lower than the consensus estimate of a 2.0-2.5% sequential growth for the period. The company expects a slower growth in Q4FY2014 because of a slower growth in the hi-tech, and retail and CPG verticals as well as cancellation and ramp-down in some projects. -
The earnings warning from Infosys seems to be more of a company-specific issue than a sectoral contagion. The demand commentary from the other top players remains positive and constructive as they maintain that FY2015 would be better than FY2014. We continue to maintain our positive stance on the sector for the next 12 months. We retain our preference for HCL Technologies and Wipro (both of which are present in our Top Picks basket). We also believe that Tata Consultancy Services would benefit from the churn out of Infosys. -
Our earnings estimates were more conservative and consequently the downward revisions are also relatively lower compared with the downgrades of the consensus estimates (consensus earnings estimates for FY2014, FY2015 and FY2016 have been cut by 1.8%, 3.5% and 1.1% respectively). The Infosys stock has corrected by close to 9% post-earnings warning. We believe Infosys' guidance for FY2015 is the next big event to restore investors' confidence in the stock. Post the correction, the stock trades at reasonable valuations of 16x and 14x FY2015E and FY2016E earnings. We maintain our Buy rating on the stock with a revised 12-month price target of Rs4,000. IRB Infrastructure Developers
Recommendation: Buy
Price target: Rs120
Current market price: Rs99 Premium deferment to help improve cash flow position; price target revised to Rs120 Key points -
IRB Infrastructure Developers (IRB) has approached the NHAI for the rescheduling of premium for the Ahmedabad-Vadodara and Tumkur-Chitradurga projects. The two projects posted a Rs27 crore loss during FY2013 and are further expected to remain under stress. -
We estimate that the company can get the benefit of around Rs400 crore by deferring the premium of the said projects. After an interest cost of 10.75%, the company can get the benefit of Rs360 crore during FY2014-15. Hence at the parent level, the financing of the shortfall for these two projects will be mitigated. -
An improvement in the cash flow position of the stressed projects in turn will lead to a faster execution of projects and is likely to improve its valuation of the EPC business along with an improvement in the NPVs of these projects. Thus, we are not assigning a discount on the NAV anymore and the price target is revised to Rs120. We maintain our Buy rating on the stock.
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