Infosys:Expectations running high Directionally on the right path, though revenue growth revival likely to be gradual: Nomura Research

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Action: Play recovery at better risk rewards

We remain enthused by: 1) strategic clarity around reinventing its core

offerings and using innovation to drive traction in newer technologies; 2)

manning these responsibilities with competent external talent; 3) likely better

cash utilization/return after 4QF. However, growth improvement might be a

gradual process as the company faces challenges due to: 1) smaller revenue

share from faster-growing services like IMS, BPO, testing and engineering

services (26% of revenue vs 38/56% at HCLT/TCS); and 2) cannibalizing

influences of higher on-premise software implementation exposure within the

consulting/system integration business (where SaaS/Cloud is gaining traction).

This keeps us conservative on our growth expectations (11% USD revenue

CAGR over FY15-17F). We prefer Buy-rated HCLT, TCS and CTSH to INFO.

Catalysts: Improvement in deal wins and cash return to shareholders

4QF: Flattish growth and decline in margins; Guidance likely to be 7-10%

For 4QF, we expect USD revenue growth of 0.2% q-q (CC growth of 2.4%

q-q) and 100bps q-q EBIT margin decline to 25.7%, due to cross currency and

non-recurrence of provision write-backs. We expect INFO to guide for 7-10%

USD revenue growth in FY16F. Indications of a lower cash payout (versus

likely street expectations of USD1.5-2bn annual payout) or a deviation from its

medium-term EBIT margin guidance (of 25% +/-1%) due to potential

investments could also be taken negatively by the Street. INFO generates free

cash flow of ~USD2bn annually and has cash of USD5.5bn.

F16/17F EPS marginally lower; TP rises to INR2260 on roll forward

Our FY16/17F EPS estimates are cut by 3/2% to account for the cross

currency impact in 4QF. We look for an 11% CAGR in USD revenue and EPS

over FY15-17F. Our TP rises to INR2,260 on roll-forward, and is based on 17x

FY17F EPS of INR132.9.