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Sell Infosys, target Rs 1,040: Emkay Global Financial Services

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Emkay Global Financial Services has a sell call on Infosys with a target price of Rs 1,040.

The current market price of Infosys is Rs 1,384.30.

Time period given by the brokerage is one year when Infosys price can reach the defined target.

View of the brokerage on the company:
No respite from KMP exodus; Profitability drop may continue: Infosys has seen a significant exodus from its leadership team in the last couple of years. Its Board has also seen a significant change in the last 12 months (See Exhibit 6-8). No specific reason(s) has been given for the exit of Mr Ranganathan, but we feel the following factors could possibly be behind this event: (1) Mr Ranganathan was seen as one of the top internal candidates for CEOs role after Mr Vishal Sikka's departure and Mr Parekhs appointment as CEO could have prompted Mr Ranganathan to start scouting for CEO opportunities elsewhere, (2) Mr. Parekhs strategy of choosing growth over profitability is a major deviation from the companys historical strategic direction (Infosys in the past has exited many large accounts to protect profitability against pricing pressures). New CEOs preference of investing in 4 areas – Digital, Onsite Localisation, Re-skilling and Automation may impact profitability in the coming years (which conflicts with –CFOs function) and (3) Infosys has committed more than 100 per cent payouts for 2 years in a row (FY18 and FY19- See Exhibit 9-10), resulting in depleting cash reserves and meets short-term investor needs at the cost of long-term investor interests.

KMP losses to weigh on financial performance; Maintain SELL: We believe the run-up in the stock despite weak growth guidance for FY19, declining margin outlook, distress sale of digital assets (Kallidus, Skava, Panaya etc), KMP exits and modest Q1FY19 performance is unwarranted. We believe the stock would see a structural de-rating in the coming months and maintain our SELL rating with a target price of Rs 1,040.

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