UBS Downgrades Infosys, Cuts Target Price by 32%

Global investment bank UBS has downgraded Infosys to sell citing longer-than-expected turnaround time at the IT outsourcer. It cut its target price on Infosys by a massive 32 per cent to Rs 2,750.

Here are the reasons why UBS has downgraded Infosys:

1) The next wave of growth for the IT sector will be led by infrastructure services and business process outsourcing, which account for less of Infosys' revenue than competitors such as Tata Consultancy Services or HCL Technologies.

2) Infosys is focusing on boosting margins at the expense of stabilising revenue and market share. Infosys reported a marginal decline in Q4 revenue (US dollars), but its margins rose 50 basis points. In contrast, TCS reported a 1.9 per cent sequential rise in revenues (US dollars) and a 60 basis point decline in margins. For the current fiscal, Infosys has guided to grow at 7 to 9 per cent (US dollar), while TCS may grow at over 16 per cent in 2014-15.

3) High staff attrition: Infosys' attrition rose to 18.7 per cent in the March quarter from 16.3 per cent in the December quarter. The company's attrition rate is currently higher than its biggest competitor TCS (11.3 per cent) as well as third-ranked outsourcer Wipro. Infosys chief executive SD Shibulal has said that attrition rate is "more than we are comfortable with." Infosys has also witnessed an exodus of top management, which had impacted .the employee morale, analysts say. The company is trying to retain staff through pay increases, promotions and other incentives.

Infosys shares traded 3 per cent lower at Rs 3,075 as of 12.15 p.m., underperforming the BSE IT index, which traded 2 per cent lower. Over the last three months, Infosys has underperformed the BSE IT benchmark, falling 12 per cent as compared to a 6 per cent drop in the IT index.

(With inputs from Reuters)