Prabhudas recommends 'buy' on Infosys, target Rs 3,175

The pricing pressure and drop in utilization resulted in margin pressure over the last 4 quarters. But, we believe bulk of the decline is already captured

EBITDA margin decline of 522bp over the last 4 quarters could be attributed to realization/productivity (overall) decline of 5pp over the last 4 quarters, Prabhudas Lilladher said in a report. The brokerage's channel check indicates that Infosys’ adopted aggressive S&M approach in CY12, which is already captured in the margin profile of the company. Infosys is reaching tail-end of the discount given to its clients. We envisage a very limited impact left to be reflected in EBITDA margin, the report said.

Focus on Product, Platform and Solution (PPS) could result in non linear growth: The management has been investing in PPS (revs: 5.5%) to drive nonlinearity. Due to smaller size the performances likely to be volatile, but increased focus would drive the momentum. Infosys bagged 3 new patents and launched new big-data solution in Q4FY13 . We expect PPS’

growth to help withstand margin pressure in near term (if any).

Utilization - The usual lever: The utilization level for Infosys is at record low. As Infosys regain volume momentum in CY13, we expect utilization to increase 5-6pp. Moreover, the company currently has 12k fresher joining in the pipeline. We anticipate stronger volume growth in CY13 to help rationalize the pyramid, which got impacted in CY12 due to weaker revenue momentum.

Valuation and Recommendation - BUY, with a revised target price of Rs3,175: The commentary for FY14 continues to be more encouraging, but strong Consulting booking for Accenture is encouraging. We expect a return to discretionary would improve revenue mix, hence help improving realization/productivity. We retain ‘BUY�' with a target price of Rs3,175, 17x (5%