Infosys weak results raises questions, spurs downgrades

Infosys weak results raises questions, spurs downgrades
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First Published: Fri, Apr 18 2008. 07 36 PM IST
Updated: Tue, Apr 19 2011. 01 04 AM IST
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* Infosys seen lagging rivals with management change, lower margins
* Brokerages cut share price target, stock rating
* Valuation gap between Infosys and rivals could narrow (Adds quotes, background)
Mumbai: Infosys Technologies shares fell nearly 4% on Monday, a day after it missed sales growth expectations, triggering a slew of price cuts by brokers and worries of loss of market share and lower margins.
Infosys shares tumbled nearly 10% on Friday, its biggest daily fall in two years, after India’s No. 2 software exporter forecast lower-than-expected annual sales growth on slower client spending.
The company, seen as a trendsetter for the $60 billion export-focussed Indian outsourcing industry, also unexpectedly announced the resignation of its human resources chief, a former CFO.
Analysts said the Bangalore-based company could lose some of its sheen and narrow its premium gap with rivals Tata Consultancy Services and Wipro due to uncertainty related to top management changes and softening profit margins as a result of wage hikes and currency volatility.
Infosys trades at 19.9 times its forward earnings compared to 24.8 times trailing earnings, while Tata Consultancy trades at 22.8 times its forward earnings.
“We believe Infosys’ performance is a company specific issue and we expect better results from TCS and HCL. We don’t see any problem with the overall demand environment in the sector,” said Subhashini Gurumurthy, an analyst with brokerage Ambit Capital.
The resignation of Infosys HR chief T.V. Mohandas Pai came amid media reports about succession plans as Chairman N.R. Narayana Murthy plans to retire in August. Infosys’ board will meet on 30 April to discuss plans.
“Overall, we expect changing times for a company that has set standards of organic, steady growth, but has lost bragging rights to TCS and Cognizant off-late,” brokerage CLSA said in a note, referring to Tata Consultancy Services and IT services firm Cognizant Technology Solutions Corp .
TCS, the top software exporter, is expected to report a 22% rise in fourth-quarter profit, while smaller rival HCL Technologies is forecast to report a 25% rise.
Both growth figures would top Infosys , which said fourth-quarter net profit grew 13.7%, lagging estimates.
“Infosys is losing market share to its rivals like TCS and Cognizant due to its premium pricing strategy and as others become more aggressive,” Gurumurthy said. “The management churn will keep revenue growth subdued in the near term.”
Shares in Infosys, valued at $38 billion, dropped as much as 3.7% on Monday to their lowest level in more than seven months in a broader Mumbai market down 1.6%. The stock ended down 2.8%.
Referring to Infosys’ forecast of a nearly 3% decline in profit margins for this fiscal year, Credit Suisse said this could be the third consecutive year in which Infosys would underperform Tata Consultancy on margins.
Infosys had operating margin of 30.2% versus 28.1% for Tata Consultancy and 11.9% for Accenture, as per the latest data from Thomson Reuters StarMine.
Underperforming company
Infosys plans to raise wages by 10 to 12% for its India-based staff for the fiscal year that started in April. Indian IT firms are struggling with high attrition and intense competition from foreign rivals such as IBM and Accenture .
CLSA said the planned reorganisation in top management had “lingered on for quite some time” and had been distracting senior employees of the company.
“This protracted exercise has somewhere played a part in Infosys’ financial underperformance and could weigh on company performance for another quarter or two,” it said in a note.
CLSA downgraded the Infosys stock to outperform from buy and cut the target price to Rs 3,175 rupees from Rs 3,875 rupees.
BNP Paribas said it expected Tata Consultancy and Wipro to report a 4% to 5% dollar revenue growth in the fourth quarter, compared to the third quarter, better than Infosys’ 1% growth.
It said said in a report that it saw Tata Consultancy and Wipro shares as “near-term alternatives” to Infosys.
“Infosys’ previously assumed magical operational excellence is blunting,” CLSA said. “The new structure will also take some time to settle down before the intended objectives come through. Till then, expect a pause in the stock.”
Credit Suisse also cut its share target price for Infosys to Rs 3,400 from Rs 4,050 and downgraded it to neutral from outperform, citing the company’s fourth-quarter revenue growth and margins as “significantly below” estimates.
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First Published: Fri, Apr 18 2008. 07 36 PM IST