Infosys likely to open lower on margin guidance disappointment

Infosys is expected to see its winning streak from the past week end and open lower today after the management guided for 100bps reduction in EBIT margin guidance for FY19.

Although the results came in-line, and the management gave out an in-line FY19 revenue growth guidance of 6-8% in constant currency terms, the street showed disappointment in the 22-24% margin guidance, as reflected in its ADR opening ~5% lower on Friday from its previous close of USD18.01. After opening at USD17.12, the ADR touched lows of USD16.49 before closing at USD16.62.

The management has attributed the drop in margin guidance to (1) required investment in the digital business, (2) localisation within markets, especially developed ones (scaling up of local talent and data centres), (3) investing in reskilling its employees and (4) for revitalizing its sales team.

We believe that the reaction that resulted in ADR decline was slightly overdone as these steps would mean that the revenue generation would be enhanced at the cost of margins. Moreover, the company has identified an amount of up to ~Rs10,400cr to be paid out to shareholders in FY19 (apart from regular dividend), which would provide support to the stock price. We believe post correction, Infosys would be an attractive bet for investors who missed out on the initial rally in the stock price as the outlook for BFSI is positive and its investments in digital would aid its revenue growth.

Infosys Ltd ended at Rs1,169 up by Rs6.75 or 0.58% from its previous closing of Rs1,162.25 on the BSE. The stock traded above its 50 DMA.

Source: Indiainfoline