The Infosys is well-positioned to regain market share and improve efficiency, a point reinforced by our meeting with executive chairman NRN Murthy. Cost optimisation could be tracking better than the managements earlier targets, and hence, margins could surprise to the upside.
Further, employee motivation has improved and recent senior-level departures should have only a limited impact. We retain our OW rating and raise the 12-month target to Rs 4,150 as we roll forward our valuation period to FY15.
Murthy admitted that Infosys billing rate premium over peers is unlikely to return as customers are now more focused on near-term cash flows rather than total cost of ownership. Thus, Infosys must focus on reducing its costs by (a) correcting the employee pyramid in onsite roles; (b) reducing the usage of subcontractors; and (c) reducing the number of senior people in business-enabling functions located onsite.
We think that the companys succession plan could be key. The term of the current CEO, SD Shibulal, ends in March 2015 and Infosys would announce the succession plan at an appropriate time.
The confidence is returning in the business model. We peg our EPS estimates at 15% ahead of consensus for FY15 and 20% ahead for FY16 largely due to our strong conviction for a margin recovery.