Panaya deal, new CEO, guidance: Analyst views on Infosys Q2 results

Contrary to expectation, Infosys remained did not name a new chief executive officer (CEO) and gave a clean chit to former CEO, Vishal Sikka on Panaya deal

The Infosys stock ended 0.8 per cent higher at Rs 934 levels on Wednesday, reacting to its September quarter numbers announced after trading hours a day earlier. While the financial performance during the quarter met analysts’ expectations, a cut in FY18 guidance surprised some.

The IT major reaffirmed the previous findings of external investigations pertaining to the Panaya acquisition and said there was no merit to allegations of any wrongdoing in the same.

Here is how leading research houses and brokerages have interpreted the statements:

Credit Suisse

There does not appear to be any material change in the company’s direction. Further reviews on issues raised by the founder have not revealed any irregularities. The search for a new chief executive officer (CEO) continues, and there is no fresh update. We have revised our estimates and target price to Rs 1,000 to factor in Q2FY18 numbers. 

Emkay Global

We believe that the traction business momentum in top accounts would remain soft in absence of a thought leader (CEO). We also see a lowered growth expectation impacting profitability in absence of any further efficiency levers, weak rupee realisation, increased investment intensity (reskill, onsite hiring) and unfavourable operating leverage. We have cut our estimates for FY19/FY20 by around two per cent each and expect Infosys to underperform in the near-term despite attractive valuation. We reiterate ‘hold’ with a target of Rs 940, valuing it at 13 times its FY20 earnings estimate.

IDBI Capital

Infosys has cut its FY18 revenue growth guidance to 5.5-6.5 per cent. We believe that the company is being conservative and is confident of it meeting the top-end of the range. We fine-tune our FY18/FY19 forecast-revenue (US$)/EPS CAGR (earnings per share; compounded annual growth rate) of 7.8 per cent/6.7 per cent and maintain an ‘accumulate’ rating with a new target price of Rs 1,000 (from Rs 988) based on 14 times its FY19E.

Edelweiss Research

Commentary on key issues — CEO search is on track; no merit in allegations of wrongdoing in acquisition of Panaya and severance payment to former CFO; and design, consulting and technology services portfolio will continue to determina key challengeirection. We believe a leadership vacuum is the key challenge for revenue growth and appointment of a CEO is crucial for the stock’s rerating. Maintain ‘hold’ with a target price of Rs 1,010.

Sharekhan

The commentary from Nandan Nilekani has no major departure from Vishal Sikka’s strategy to accelerate growth though newer services, which we view as a positive. We believe the downside risk is protected to certain extent as Infosys is currently trading at a steep discount to Tata Consultancy Services, which has a similar growth profile. Upcoming buyback program will also protect the downside risk. With the absence of growth triggers and management transition issues, we maintain our ‘hold’ rating on the stock with the price target unchanged at Rs 1,000.

Elara Capital

We think the sharp guidance cut indicates a return to its old practice of guidance so conservative that it cannot fail to meet it. We reduce revenue estimates by 1.1 per cent, 3.7 per cent and 4.4 per cent for FY18E, FY19E and FY20E, respectively. Expecting slightly better margins, we increase our profit after tax estimates for FY18E by 2.5 per cent, while reducing it for FY19E and FY20E by 0.7 per cent. Our target price is Rs 930 on 15 times its September 2018 price-to-earnings (P/E) estimate (vs June 2018E P/E). We maintain a ‘reduce’ rating.