NEW DELHI: NR Narayana Murthy has once again displayed tactical finesse after takingge as chairman of Infosys by increasing wages for the company's 1.5 lakh employees.
Analysts said that the decision taken by its chairman will help the company to regain the losing confidence of employees. Along with that it is probably the first step in restoring confidence among stakeholders in the India's second largest software exporter.
"Although TCS remains our top pick in the IT sector, Infosys is clearly the dark horse in the race," said Sandeep Bhatia, executive director & head of sales, Kotak Institutional Equities.
"Investors are building a lot into Mr Murthy's return to the company and the market is in the mood to give this benefit of doubt," he added. Bhatia is of the view that the stock looks interesting a market perspective because the market is willing to back the change in management and their actions.
According to analysts, the wage hike decision by Infosys management is indeed positive for the IT exporter but it might have an impact on Ebitda margin of the company.
"Although the move is positive, but the announcement will have an impact on Ebitda margin of 150 bps for the IT major," Motilal Oswal Securities said in a note on Friday.
However, if the currency stays at current levels the impact will be marginal. Our Ebit margin assumption for FY14 is unchanged at 24% following revised currency assumption of INR56/USD vs INR54 earlier, it added.
Infosys announced wage hikes for FY14, with offshore employees getting 8% hike effective 1st July and global sales force getting the same quantum effective May 1.
"We see this as the first among many steps taken by the changed management in order to increase confidence of various stakeholdersemployees, clients and investors in the company," Prabhudas Lilladher said in a report.
The brokerage firm maintains 'BUY' on the stock with a 12-month target price of Rs 2900. "The wage hike should help the company regain confidence of employees. Moreover, it would help them retain and attract good talent," added the brokerage firm.
The wage hike given by Infosys is at the top end of the industry as compared to TCS, which has given a hike of 7% to Offshore, 2-4% to onsite, and 5% to RoW.
Wipro has given a wage hike of 6-7% to offshore employees and 2-3% to onsite. On an average, the industry has given a wage hike of 7% to offshore employees and 2% to onsite employees.
Most experts acknowledge the fact that currency plays a very important role and if the rupee stays at the same level for some more time, the wage hike impact will be limited.
"Infosys has increased wages of its employees and since most of the earnings are in dollars terms, the company can absorb the wage hike without much trouble," said Ranjan Dhawan, ED, BOB in an interview with ET Now.
The rupee has depreciated by 7% since the start of Q1FY14. The new management is more than willing to share the currency benefits with employees rather than with clients, Prabhudas Lilladher said in a report.
The brokerage firm sees an impact of 160 bps due to wage hike in Q2FY14 and 40 bps in Q1FY14. "Overall, we have tweaked our currency assumption; hence, the impact on the bottom line is nullified despite 100bp downward revision in margin," it said.
Going forward, analysts expect more tough decisions the new management to revive sentiment and instill confidence among its stakeholders. Infosys' operating performance in the last couple of quarters exemplifies the nature of volatility in its business portfolio.
"Positive surprise to margin estimates will be a function of increased traction in discretionary spending, which will reduce the pressures on growth and pricing, and consequently the aggression in pursuit of growth in commoditized areas," Motilal Oswal said in a report.
The brokerage expects Infosys to grow its USD revenues at a CAGR of 9.1% over FY13-15 and EPS CAGR of 6.2% during this period.
Motilal Oswal has a target price of Rs 2,800 which discounts FY15E EPS by 15x which implies an 18% upside.
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