The prospects of technology giant Infosys Ltd's stock may be in for a change, going by the recommendation of Bank of America-Merrill Lynch (BoA-ML). Infosys, which has been struggling to grow and has been consistently missing its own guidance for past few quarters, saw BoA-ML upgrade the stock from 'neutral' to a 'buy' with a price target of Rs 3,200 on September 18. The improving sentiment is consequent to the hope of recovery in discretionary spending. Last week, the company also acquired consulting firm Lodestone.
BoA-ML, which added the stock to its portfolio, says: "This is on account of (a) management taking action to remedy gaps in the services portfolio, selling effort and execution–and this is starting to yield results, and (b) Infosys is likely to be a key beneficiary of any pick-up in discretionary IT (information technology) spend as business confidence picks up, post the dovish stance by Fed/ECB (European Central Bank)."
The authors of the report, dated September 18, Jyotivardhan Jaipuria, Anand Kumar and Mitali Ghosh, also expect the stock to re-rate from a one-year forward target price/earnings of 14 times to 16 times, narrowing the price/earnings discount versus Tata Consultancy Services back to 10 per cent with commentary on improving deal traction to be a stock trigger. On Tuesday, Infosys' stock jumped 2.2 per cent intra-day before closing 1.45 per cent up at Rs 2,600. Sensex remained flattish with a downside bias.
However, not all brokerages share an optimistic view. Other leading brokerages such as Credit Suisse maintain their 'neutral' view. Currently, as per Bloomberg data, about 45 per cent of brokerages tracking Infosys have a 'buy' recommendation, while 39 per cent have a 'hold' recommendation, with average target price of Rs 2,531, a tad below the current market price.
Analysts say rupee appreciation and slower-than-expected recovery in discretionary demand, along with higher competition, remain key challenges for the company. Credit Suisse analysts believe the Infosys scrip is fairly valued. In their report of September 17, Anantha Narayan and Sagar Rastogi of Credit Suisse note: "There does not seem to be any likely "negative" surprises unlike the previous two quarters which saw unanticipated drops in volume and pricing."
The analysts believe despite volatile demand environment, management is likely to stick to its FY13 revenue growth guidance of five per cent. While small pricing cuts in the BFSI (banking, financial services and insurance) space are likely, overall pricing and margins are expected to remain stable. However, many analysts believe the discretionary spends are yet to stabilise, which means that growth rates will remain under check in the near-term.
While the views of leading brokerages on Infosys remains mixed, the markets will know which way the scrip goes in less than a month as Infosys declares its results and guidance for the remaining part of FY13.