Investor's Eye: Update - Infosys (Soft outlook, attractive valuation), UPL (Re-rating to sustain aided by improving outlook)

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Investor's Eye [June 06, 2014] Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE   Infosys Recommendation: Buy Price target: Rs3,550 Current market price: Rs3,000   Soft outlook, attractive valuation    Key points  In a recent meeting with investors, Infosys' management primarily touched upon four issues: the revival of revenue growth, margin trajectory, rising attrition and a slew of top-level exits. The management stated that getting back on growth track is the top priority. It indicated it is aggressively chasing large traditional IT outsourcing deals (by being more competitive on pricing and innovation). It will strengthen its sales team by about 400 people in FY2015. The attrition rate is expected to come down gradually (currently at a concerning level of 18.7%), though it will remain at elevated levels in the near term. On the search for a new CEO the management said that it is reviewing a potentially large set of internal and external candidates and refrained from giving out any specific timeline for the completion of the process.  The concerns over the several top-level exits in the last one year, the suspense over the new CEO and the predictability of growth (which is lagging behind compared with the peers) are weighing on the stock's performance. The stock has fallen by 22% in the last three odd months. We believe it will be a long road ahead before we see Infosys' earnings performance catching up with that of the bigger IT companies. Given the volatility in the counter, it will be futile to take an investment call based on the quarterly earnings performance of the company. At the current level, the stock is available at a reasonable valuation of 13x FY2016E earnings coupled with a strong cash balance (more than Rs30,000 crore) restricts any major downside. We maintain our Buy rating on the stock with a price target of Rs3,550.  Key risks: (a) a prolonged transition process would dent sentiments further (a company-specific risk); and (b) significant strengthening of the rupee against the dollar could affect our earnings estimates further (a sector-specific risk).      UPL Recommendation: Buy Price target: Rs354 Current market price: Rs315   Re-rating to sustain aided by improving outlook    Key points  The new government will focus on agriculture by launching a nation-wide rural irrigation programme and an insurance scheme to protect farmers' income. The government's focus will be on improving the condition of the marginal farmers (liquidity position, removal of middle man and reducing their dependency on rainfall) which will be a big positive for the agri-input companies. Hence, United Phosphorus Ltd (UPL) being one of the major players in the Indian fertilisers market will be the biggest beneficiary of the reforms in the agriculture sector. The demand environment for agro-chemicals remains positive across geographies on account of a favourable weather condition projected by different meteorological departments. The North American and domestic markets will play a key role in revival of the demand for agrochemicals as both the markets are witnessing uneven weather patterns. UPL aims to restructure its European and Latin American businesses in order to consolidate its manufacturing units and improve its profitability. The company plans to focus on managing the working capital cycle to around 95 days even if the sales in Latin America improve at a faster pace compared with the other geographies. The management is focusing on improving the return ratios and rewarding the shareholders handsomely by giving higher dividends, buying back shares etc. The management has maintained its guidance for a 12-15% growth and margin improvement of 100 basis points for FY2015. Big agricultural reforms in the domestic market coupled with a strong demand environment across geographies will improve the company's prospects and help it to easily achieve the higher end of the guided growth range. In view of the company's focus on improving its balance sheet and maintaining a high growth, we have assigned a higher multiple to the stock. Hence, our revised price target is Rs354 and we maintain our Buy rating on the stock.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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