CLSA upgrades Infosys; says it's well positioned to benefit from rising demand

Narayana Murthy's decision to curtail the declining profitability of Infosys is expected to start showing results

With measures initiated by co-founder N R Narayana Murthy's decision to curtail the declining profitability of Infosys expected to start showing results, brokerage firm CLSA has said that the company is now well-positioned to benefit from the demand recovery in the market. In view of the same, the Hong Kong-headquartered brokerage firm also upgraded Infosys' shares to 'buy' from 'outperform' earlier.

"With operational efficiencies in place and a renewed focus on faster-growing infrastructure services, Infosys is likely to yield better revenues as the industry enters a period of recovery and growth," analysts Ankur Rudra and Rohit Kadam of CLSA wrote in a report. "It (Infosys) appears better-positioned to capture the next digital wave and emerge as a champion that is worthy of a re-rating despite missing the last wave."

CLSA's move is in line with the sentiment across analysts and investors, who are confident of a recovery at the country's second largest information technology (IT) services company, amid the measures that Murthy initiated during his second-innings at the company last year.

Among other things, Murthy had implemented a three-pronged strategy for bringing Infosys back to a high-growth track, which included improvement in sales effectiveness, enhancement of delivery effectiveness and cost optimisation. While the first two measures are expected to start showing results in the near-future, cost optimisation has already started reflecting in the company's financial performance.

Also, at his last speech as the chairman at the Annual General Meeting (AGM) of Infosys in June this year, Murthy had said he has started several "strategically critical initiatives" that, if continued, have the potential to change the DNA of the company for the better.

Investors' faith in Infosys' recovery has been fueled further after the company brought in Vishal Sikka as its chief executive officer after the retirement of S D Shibulal earlier this year. Sikka, who was earlier the chief technology officer and executive board member of German software major SAP, is widely considered an ace technocrat and expected to bring in innovation and new ideas to Infosys.

Additionally, CLSA said that the demand environment for Indian IT services companies is currently "solid" and there is a healthy deal flow in the market.

"Traditional IT services led by infrastructure management are likely to continue to be primary drivers of offshore IT growth for the next couple of years," CLSA said. "A stable demand environment and easy supply has kept confidence on maintaining margins high. We turn incrementally optimistic on the sector," it added.

Among the large-size IT services companies, CLSA said, Tata Consultancy Services (TCS) is the one that is likely to benefit the most from the current strong demand environment, and may continue to post sector-leading revenue growth.

"TCS is a prime beneficiary of growing demand for offshoring and stands as the leading digital vendor. As the industry embarks on a new technology spending cycle, we expect TCS to enjoy sector-leading revenue and earnings growth," it said.