Home > Markets > Stock Markets > Infosys shares fall sharply on Q4 results, TCS shares jump
Many analysts view Infosys guidance for FY20 as conservative
Many analysts view Infosys guidance for FY20 as conservative

Infosys shares fall sharply on Q4 results, TCS shares jump

  • Infosys has guided for 7.5-9.5% revenue growth in constant currency terms in FY20
  • Infosys operating margin in the March quarter dropped 3.2 percentage points from a year ago to 21.5%

IT major Infosys reported a mixed bag of fourth quarter numbers, with margins coming in below expectations even as revenues came in-line. Infosys also reported strong large deal wins during the quarter which came in more than $1.5 billion. Infosys’ guidance for this fiscal starting April 1, 2019, came in below the Street’s estimates. Infosys shares fell as much as 5% in early trade before closing 3% lower. Infosys' bigger rival TCS, which also reported Q4 earnings on Friday, jumped 5% today.

Coming back to Infosys' fourth quarter numbers, the company reported strong 2.1% sequential rise in constant-currency revenue, underscoring strong execution and strong order inflows. This is the second successive quarter where Infosys has achieved more than 10% growth year-on-year in constant currency. The Bengaluru-based company said it signed large deals of $1.57 billion during the quarter, taking the cumulative size of deals won to $6.28 billion for the full year. This is twice that of FY18.

In this context, many analysts say that the growth momentum, which picked up in FY19 will continue in FY20. So, they view Infosys’ guidance of 7.5-9.5% growth in constant currency terms as conservative.

“We believe the IT major is being conservative in terms of its revenue guidance for FY19, which is slightly below what we were expecting (8-10%)," Reliance Securities said in a note.

Ravi Menon, lead analyst for IT at Elara Capital, said that Infosys growth guidance for FY20 was "disappointing" given large deal wins in FY19.

In terms of profitability, Infosys operating margin in the March quarter dropped 3.2 percentage points from a year ago, to 21.5%, led by wage hike impact and possibly costs related to large deal integration. This was below the Street’s estimates. The company also expects margins to remain suppressed in FY20 as well, guiding for in a range of 21-23%.

Analysts also remained concern over rising attrition, which was above 20% in March quarter. “Attrition remains a bug-bear. This is an area that Infosys needs to focus given major digital talent shortage and attendant margin pressure due to wage cost inflation," Reliance Securities said in a note.

Another brokerage Centrum has revised Infosys ratings to "Add", from "Buy" earlier. "Infosys’ Q4FY19 results delivered a steep miss on EBIT margin. The company has also lowered EBIT margin guidance band to 21-23% for FY20. We trim EPS estimates by 4.0/3.8% for FY20E/FY21E owing to the EBIT margin downgrade," it said in a note.

Centrum believes that the open-market buyback could act as a medium-term support for Infosys shares. Infosys initiated buyback from March 20, 2019, after receiving all requisite approvals. Out of total buyback size of 8,260 crore, the company has bought back shares worth 1,546 crore so far.

Tata Consultancy Services Ltd (TCS), India’s largest IT services company by revenue, ended fiscal 2019 with double-digit revenue growth as the company reported a 11.4% growth in constant currency terms in the fiscal ending 31 March, the company said in a statement. For the March quarter, TCS reported a revenue growth of 2.4% from the preceding three months in constant currency terms. Revenue grew 12.7% from the same period a year ago.

This is TCS' fifth straight quarter of year-on-year double-digit revenue growth in constant currency terms.

In terms of deal wins, TCS also did well, bagging contracts of $6.2 billion last quarter, higher than the $5.9 billion of deals it secured in the December quarter.

The rising cost of business also hit TCS' profitability. Its operating margin contracted for the second straight quarter. It softened 30 basis points from a year ago to 25.1% in the fourth quarter of FY19.

Though Q4FY19 operating margin dipped 50bps QoQ, FY19 margin improved 80bps YoY. We attribute the latter to higher growth and excellent execution. Moreover, TCS’ investments in digital capabilities and sales initiatives are now reaping dividends. We believe, margin will sustain at the current level on account of robust revenue growth and tight leash on attrition.

Edelweiss Research

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