Infosys reported better-than-expected earnings in the first quarter, prompting brokerages to raise their earnings estimates for the current financial year. However, many say Infy's performance will have to be consistent over the next few quarters for them to upgrade the stock.
However, hardly anyone has raised their rating on the stock, with many still advising investors hold or reduce/sell Infosys, raising doubts on sustainability and consistency in performance.
"Infosys' revenue growth has been volatile and we need to see consistency in revenue growth for investors to turn constructive. The margin has also steadily trended down and is now down 440 bps year-on-year," said Anantha Narayan and Sagar Rastogi of Credit Suisse. They maintained their "neutral" rating on the stock.
Avendus Securities raised its earnings estimates on Infosys by 1 percent for FY14 and 13 percent for FY15. Revenue estimates have been raised by 7 percent and 10.5 percent, respectively. However, it too raised concerns on margins and said it would maintain a "hold" until there is "consistency in execution."
"Management commentary was not particularly encouraging, and indicated weakness in discretionary spending and pressure on margins. Despite strong client metrics, a ramp up in execution and sustained recovery might take time, given the ongoing organisational restructuring," said Avendus analyst Priya Sunder.
Sunder says high attrition (at historical high of 16.9 percent), toughening visa laws and pricing pressure in the renewal deal market could impact margins ahead.
ICICI Direct.com analysts Abhishek Shindadkar and Hardik Varma also feel Infy's earnings are becoming "increasingly unpredictable."
They raised their earnings per share estimates for FY14 to Rs 174.2 from Rs 170.5, following first quarter earnings, which they say were "generally upbeat". But the earnings commentary on discretionary demand trends, was "surprisingly grim," they say.
Antique Stock Broking raised earnings estimates by 2-3 percent but maintained a "hold" rating on Infosys, as it expects revenue volatility to stay.
Among other brokerages Sbicap Securities also maintained a "hold", Kim Eng advised investors "sell" the stock and Nomura has a "reduce" rating.
On the other hand, Emkay and Axis Capital are bullish on Infosys.
Manik Taneja of Emkay Global Financial Services, for isntance, continues to back improvement.
Emkay maintained its "buy" rating on Infosys (upgraded post the reappointment of Narayana Murthy as the executive chairman in June).
"We continue to back return to predictable ways under Narayana Murthy's stewardship for Infosys ahead...unlike the volatile financial performance that we have witnessed from Infosys through FY11-13," Taneja said.
He points out that Infy's sequential volume growth in IT services in Q1 was 4.1 percent, highest since September 2011, and onsite volume growth trajectory has improved to 20 percent year-on-year, versus 6 percent in June 2012 quarter.
Infosys shares were down 1.6 percent at Rs 2,760 on Monday afternoon as investors booked profits. The stock had closed up near 11 percent post the earnings on Friday.
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