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Why UBS has downgraded Infosys

May 08, 2014 09:08 IST

Why UBS has downgraded Infosys

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Itika Sharma Punit in Bengaluru

Brokerage firm UBS Securities on Wednesday said it expected recovery at Infosys with founder N R Narayana Murthy at the helm to take longer than expected.

The Zurich-based brokerage house also downgraded its rating on shares of India's second biggest information technology company to 'sell' from 'buy' and reduced the target price by about a third to Rs 2,750.

Reacting to the development, shares of Infosys on Wednesday fell three per cent on the BSE, ending at Rs 3,064.45 and dragging down the IT sector index in a nearly flat market.

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Image: Shares of Infosys on Wednesday fell three per cent on the BSE.
Photographs: Reuters

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Why UBS has downgraded Infosys

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"With recent commentary indicating the firm is having trouble jump-starting growth in its base segment, we think a turnaround could take longer than expected," Diviya Nagarajan, analyst at UBS Securities, said in a note.

Chart"We believe Infosys' low exposure in the growth segments of infrastructure services and business process outsourcing will keep its revenue growth prospects lower than those of its faster-growing peers in next two-three years."

Nagarajan also voiced concerns about attrition at Infosys, at a record high of 18.7 per cent in January-March.

She said it might rise further after a salary increase of six per cent announced by Infosys, lower than the 10 per cent average increment for offshore employees announced by competitor Tata Consultancy Services.

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Image: UBS feels that a a turnaround could take longer than expected.
Photographs: Reuters

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Why UBS has downgraded Infosys

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The fear is other brokerage houses might follow UBS' downgrade but most firms contacted by this paper said they had no such plans. Analysts said investors had factored in a three-year period for the restructuring at Infosys to show results.

"Given the fundamentals and the fact that we are not privy to any negative events at the company, we do not see any need to revisit our stance," said a senior analyst at a multinational brokerage house requesting anonymity.

Narayana Murthy returned to Infosys in June last year, when the company faced shrinking market share and declining profit.

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Image: The Infosys campus.
Photographs: Reuters

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Why UBS has downgraded Infosys

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He has said the measures being undertaken to bring Infosys back to sector-leading growth might take up to three years to start showing results.

The cost optimisation measures would start yielding results in six-18 months; sales effectiveness would start reflecting in nine-21 months; and software delivery effectiveness would show up in 18-36 months, Narayana Murthy told investors earlier this year.

"We are confident about the recovery in the demand environment and we feel that Infosys is taking the right steps that will lead it to improved performance," said Shashi Bhushan, a senior analyst at brokerage firm Prabhudas Lilladher.

"Infrastructure services and BPO (business process outsourcing) account for less than 15 per cent of Infosys' revenue, against 25-35 per cent for TCS and HCL Technologies," UBS said.

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Image: Measures being undertaken to bring Infosys back to sector-leading growth might take up to three years to start showing results.
Photographs: Reuters

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Why UBS has downgraded Infosys

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"Infosys is now beginning to focus on these segments but in the next two to three years, we think the company's large base (85 per cent) in the slower growing applications segments will remain a drag on revenue growth," it added.

UBS the odd sceptic

However, most analysts differ.

They believe while infrastructure services and BPO might see higher growth than other segments, spending by clients is rising across the board and Infosys will benefit from this trend.

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Image: Infosys campus.
Photographs: Reuters
Tags: UBS , BPO

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Why UBS has downgraded Infosys

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"Infrastructure management services is a multi-year theme and the market share gain for Indian infotech vendors is playing out now," said Abhishek Shindadkar, infotech analyst at ICICI Direct.

"Even as new spending in infrastructure management services is muted, Indian players are strongly expanding their market share in this segment."

Other analysts who did not wish to be named said UBS lowered its target price for Infosys because its earlier target of Rs 4, 050 was "too steep". Most analysts have a target of Rs 3,300-4,000 for the scrip.

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