NEW DELHI: IT major Infosys’ margin guidance for FY19 negatively surprised Dalal Street as did its not-so-optimistic commentary on the banking and financial space.
But a 6 per cent fall on its shares on Monday morning was uncalled for, analysts said. The stock hit a day’s low of Rs 1,099 but later pared losses to close at Rs 1,132, down 3.10 per cent from last close.
Besides slower revenue growth guidance, there was too much buzz around the company’s decision to sell off Panaya and Skava acquired during Vishal Sikka regime, which made investors react negatively.
“It was too much of a knee jerk-reaction for just lowering the margin guidance. The last time when Accenture came out with lower margin guidance, the stock had fallen 6-7 per cent. We will have to see how the growth pans out as incrementally IT outlook is looking positive,” said Jinesh Gopani, Head (Equities) at Axis AMC.
Infosys on Friday lowered its margin guidance to 22-24 per cent for FY19 from 23-25 per cent in FY18. The company gave FY19 revenue guidance for 6-8 per cent growth in constant currency terms and 7-9 per cent in dollar terms, which just about met Street expectation. The management commentary on margins was a bit too conservative, analysts said.
Top five foreign brokerages, including CLSA, Citi and Nomura India, have an average target of Rs 1,290 post Q4 earnings.
The Infosys management intends to increase investments in digital space and expand sales investments to drive large deal wins and focus on localisation of business i.e. investing in onsite delivery and local hiring.
“Infosys has reset the margin band lower despite strong margin execution in FY18 and favourable Q4FY18 EBIT margin. We believe Infosys is building conservatism in margin guidance. Considering the strong execution on margin front in FY18, we only marginally trim our Ebit margin assumptions to 23.9/24.1 per cent for FY19E/FY20E,” said Prabhudas Lilladher.
The sale of Skava and Panaya is reflective of a mere rejig in portfolio, rather than a refresh of ‘software-led services’ strategy, Ambit Capital said following an interaction with the management.
“The company’s latest acquisition gives us confidence that Infosys is not averse to inorganic capability tuck-ins. Despite the expected noise around Panaya & Skava, we retain Infosys as our top buy given robust portfolio and attractive valuations,” the brokerage said.
As far as BFS space is concerned, softness does persist in tech spending among large US banks owing to higher capital allocation for internal spending.
But brokerage Edelweiss Securities in a recent note pointed out that its survey of San Francisco’s Bay Area and Oakland suggests much stronger spending momentum in BFSI, retail and energy verticals than communicated by large Indian IT companies.
“5G capex is spurring interest in communications vertical earlier than expected. In our view, if the above verticals—contribute almost 53 per cent to Indian IT services—recover, growth acceleration will be much faster and sharper than anticipated,” it said.
The Infosys management expects its BFSI growth to be better in CY2018 compared with that in CY2017 on account of a diversified portfolio of regional banks, small banks and European banks and shifting of spending from regulatory to growth-related areas.
Infosys is set for revival, as investments (despite their near-term margin impact) are likely to lead on to quality growth, said HDFC Securities.
Meanwhile, the retention of capital allocation policy – returning of Rs 13,000 crore to shareholders in FY19 in the form of dividend or buyback – is likely to support the stock from any major downside in the near-to-medium term.
Source: Economic Times