Shares of Infosys ended 3% lower on Monday after losing 6% during the day as analysts remained worried about the IT major’s weakening margin outlook for financial year 2019. Infosys closed at Rs1,132.80, down 36.2 or 3.10% on the BSE.
According to Nomura, despite a margin beat in the March quarter, the bigger disappointment was that FY19 EBIT margin guidance was slashed by 100 basis points (bps) to 22-24%. The Japanese brokerage firm said the results and outlook indicate that FY19 is not likely to see a material acceleration, traditional levers are being exhausted and the company needs to realign onsite staffing in light of US immigration tightening, which will put pressure on margins. Nomura has a ‘reduce’ rating on the stock with target price 14% below consensus, on 5% lower earnings per share (EPS) estimates and higher pessimism on multiples to reflect higher uncertainty and possible growth and margin risks.
“We believe the $2 billion additional return of capital in FY19 will cushion an otherwise tepid earnings growth even as buyback cannot happen before December 2018. We believe street estimates are at risk, as they build in material growth acceleration and flat-to-improving margins,” it said in a note on 16 April.
Jefferies India Pvt Ltd agreed that the cut in margin guidance was the key disappointment even as Q4 performance and FY19 revenue growth guidance of 6-8% were in line with expectations. “We revise our estimates to build in 7.5-9% constant currency growth over FY19-21 and 23.5-23.8% EBIT margin. The stock is currently trading at 16.5/15 times FY19/20E price to earnings and at a 20% discount to TCS even as underperformance relative to it has narrowed, making risk-reward favourable in our view,” it said in a note on 16 April.
Emkay Global Financial Services Ltd said continued sluggishness in US BFS markets, modest FY18 growth of 5.8% in constant currency terms, soft Q4FY18 exit growth of 0.6%, weak deal total contract values (down 12%) and decline of 1.5% in top 10 clients in FY18 indicate that Infosys would achieve growth closer to the lower end of its guidance range of 6-8%.
“Weak profitability guidance for investment in sales revamp, reskilling of employees and building of Digital capabilities suggest new CEO’s lower confidence in the current capabilities of the company,” said Emkay in a note on 13 April.
Emkay has a ‘reduce’ rating on the stock and believes that frequent leadership changes and conservative investments in future technologies have impacted the business momentum.
According to Elara Securities (India) Pvt Ltd the decision to divest Panaya and Skava suggests that the commitment to platforms strategy, pursued under former CEO Vishal Sikka, is wavering and is concerned that this undermines the credibility of offering any platforms to clients in future.
However, Infosys has the most ‘buy’ ratings among all technology major stocks such as TCS, Wipro and HCL Technologies. According to Bloomberg data, Infosys has 40 ‘buy’ ratings, 7 ‘hold’ and 6 ‘sell’. In contrast, TCS has 15 ‘buy’ ratings, Wipro has 7 and HCL Tech 32. TCS will announce its March quarter results on 19 April.