IT major Infosys reported a jumbled set 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 to ₹713. Infosys’ bigger rival TCS, which also reported Q4 earnings on Friday, jumped as much as 3.5% to₹2,085.60.
Coming back to Infosys’ fourth-quarter numbers, the company reported a 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 feel Infosys’ guidance of 7.5-9.5% growth in constant currency terms is conservative. Infosys shares declined to as much as 4.7 percent to Rs 712.60 per share intraday on the NSE.
Many analysts, including Citi and Morgan Stanley, downgraded the stock following the Q4 results. HDFC Securities said that Infosys’ softening FY19 margin trajectory (-150bps vs. +80bps for TCS despite INR tailwinds), is expected to continue over FY20 (-160bps erosion). This is derived from an increase in cost of delivery (higher localisation, sub-contracting) and the persistent challenge of high attrition, large deal investments and softness in the core BFSI vertical.
The brokerage downgraded the stock to ‘Neutral’ from “Buy” and revised the price target to Rs 755 from Rs 805. Morgan Stanley lowered its rating on the stock to “Equal-weight” from “Overweight”, saying the company’s Q4 earnings were softer than their expectations. The brokerage cut EPS estimates for Infosys by 2.5 percent and 3.9 percent for FY20 and 21, respectively.
Citi cut its rating on the stock to “Neutral”, with a revised TP of Rs790. The weaker than expected margin performance in 4Q and continued high attrition, has lowered its EPS estimates by 3-4 percent.
Even though the ongoing buyback will support, the argument for further narrowing of discount vs. TCS is weaker given that revenue guidance is a bit light and margins keep sliding lower, added Citi.
