In our view, the departure of Ashok Vemuri and the recent resignations of other key business heads in the largest geography, the US (61.4% of revenues), and largest vertical, financial services (33.7%), have the potential to affect the Infosys‘ business in this market. This is crucial at a time when, under the new executive chairman NR Narayana Murthy, the company is in a ?course correction mode? and trying to win market share. We would look for concrete steps from management to stem talent loss and strengthen management. Until then, we retain our ‘hold’ rating on the stock with a target price of Rs 3,200.
The loss of senior business heads in the strongest market and an inferior positioning in key growth market ? Continental Europe ? increase the hurdles before management in its quest for revenue growth revival. While a weaker Indian rupee can help Infosys to price its services competitively, the continuation of senior management exits can blunt the effectiveness of these measures.
Given its scale and geographical diversification, Tata Consultancy Services (TCS) benefits from 1) economic recovery in the US, 2) a rebound in demand from the financial services vertical (42% of rev vs. 34% for Infosys), 3) continued strength in demand for outsourcing from Europe (biggest beneficiary), and 4) a pick-up in discretionary spending.
We reiterate TCS, Rs 1,837, Buy, TP Rs 2,150) as our top pick, along with Tech Mahindra Ltd.
Our target price is based on a target P/E of 16x FY14E/09, which we believe is fair given an earnings CAGR of 13% over FY14-16E and a PEG of 1.1.
Deutsche Bank
