The March quarter earnings started on a muted note after Infosys delivered a below-par sequential performance with both revenue and margins missing Street estimates. There are plenty of headwinds for India’s second largest software exporter as it enters another year of the low growth environment.
USD revenue rose by just 0.7 percent on a quarter-on-quarter (QoQ) basis with flat revenue in constant currency (CC) terms, which reflects pressure in Retail (-2.7 percent QoQ) and Healthcare (-12.4 percent QoQ) verticals, suggest experts.
The stocks slipped sharply on Thursday after it said that CC revenue growth guidance of 6.5-8.5 percent for FY18E which missed Street expectations of 7-9 percent.
The management has given a conservative revenue guidance of 6.5-8.5 percent in constant currency terms for FY18 and has also lowered its EBIT margin guidance to 23-25 percent citing visa concerns, higher investments in offshore and cross currency impact.
Infosys stock which closed 3.8 percent lower on Thursday broke below its 13-days exponential moving average (DEMA), 10-DEMA, and 5-DEMA. The supertrend indicator is also showing a downtrend for the stock while the MACD has already given a sell back in the month of March.
It looks like the trend is sharply on the downside and it makes sense for investors to get into Infosys only if they are planning not to sell the stock in near term. It is a good buy for investors who plan to stay in the stock for more than a year as valuations look inexpensive.
Things will not be easy for this software giant and worries like higher Visa costs, currency headwinds, and a slowdown in growth will continue to weigh on prices.
“We expect a stronger rupee against US dollar, adverse macroeconomic environment, and H1-B visa to remain a key concern,” Saji John, Research Analyst at Geojit Financial Services told Moneycontrol.com.
Most brokerage firms which released their views maintain their buy rating on the stock with a target price of up to Rs 1,249 which translates into an upside of over 30 percent from current levels.
But, nobody is gung-ho on the stock. It makes sense for investors to buy when the stock slips to Rs 850 but retains it for more than 2 years before you book profits.
AK Prabhakar, Head -Research at IDBI Capital advises investors to accumulate the stock if it slips below Rs 850-900 for medium to long term.
Angel Broking maintain a most aggressive target price of Rs 1,249 on Infosys for a period of 12-months while other brokerages such as Reliance Securities, Sharekhan, and Systematix have a target price of around 1000-1150 which translates into an upside of nearly 20 percent.
“At current levels, valuations appear to be reasonably inexpensive (14.7x/13.3x FY18E/FY19E EPS). Though the near-term outlook seems to be subdued on the back of a challenging macroeconomic environment and industry-specific headwinds,” Reliance Securities said in a note.
“We believe that decent deal wins (US$806mn vs. US$664mn in 3QFY17), potential improvement in the US economy, a stronger 2HFY18E and return of cash to shareholders are factors that would deter any major stock price correction,” it said.
Infosys no longer a growth stock?
Tweaking its capital allocation policy, Infosys will now return up to 70 percent of free cash flow to shareholders from 50 percent of post-tax profits earlier.
Further, it will also return up to Rs 13000 crore to shareholders in FY18 through a combination of dividend and/or buy-back, which amounts to 40 percent of cash and liquid investments as of FY17-end.
This is a positive move but growth worries will continue to weigh on the stock. Investors have to now understand that the stock which was gave multibagger returns in the past and was able to beat the benchmark numerous number of times might not be able to do so in future.
With no big bang acquisitions lined up for the software giant, Infosys is now attracting investors which have a risk averse attitude towards equities with its dividend payout strategy. A step in the right direction towards shareholder value creation.
“Infosys intends to return part of cash and recasting capital allocation policy a step in right direction towards shareholder value creation,” ICICI Securities said in a note. But, we have lowered target multiple at 15x due to slowing growth trajectory, growing protectionism measures leading to risk in margin profile, it said.