We retain our 'overweight' rating on Infosys Ltd although the stock could react negatively due to near-term weakness. We reduce our FY14-15 US dollar revenue growth rates by 0.5-4.3%, which in turn impacts our EPS estimates by 0.7-5.0%.
We now expect a 0.6% sequential revenue decline rate for Q4FY14 (versus 1.5% growth earlier). The changes push our P/E-based price target down to Rs 3,960 (earlier Rs 4,150).
We recently met with Infosys executive chairman Narayana Murthy, CEO SD Shibulal and CFO Rajiv Bansal at a Barclays investor conference. Management suggested that revenue growth for FY14 will likely track at the lower end of its guidance. It attributed this slowdown to a) weakness in the retail, CPG and Hi-Tech verticals (c25% of revenue) and b) the delay in some project ramp-ups due to skill-set mismatches and client-specific issues. For the longer term, management said the company remains focused on revenue growth and aspires to achieve growth rates ahead of the industry with industry leading margins.
Murthy indicated that revenue growth would be the key determinant of the success of his tenure.
The strategy is to return to industry-leading growth rates in the following two years. On the ebit margin front, Infosys aims to achieve industry-leading margins (25-27%) in the medium term.