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How should you trade Infosys post lacklustre Q4 earnings?

Analysts are mixed on the Vishal Sikka-led company with most brokerages still betting on it but slashed target price and earnings per share (EPS) estimates.

April 27, 2015 / 10:26 AM IST
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Moneycontrol Bureau

Disappointed investors hurriedly sold shares of Infosys after it posted poor January-March quarter earnings. The IT major blamed cross currency impact and sluggish performance by the energy vertical for the Q4 performance. The stock ended with a sharp fall of 6 percent on Friday. It, however, surprised investors with a 1 for 1 bonus share issue.

So, how to trade the stock now?

Analysts are mixed on the Vishal Sikka-led company with most brokerages still betting on it but slashed target price and earnings per share (EPS) estimates.

CLSA reiterates it as high conviction buy but trimmed FY16-17 earnings and target price by 5 percent at Rs 2650 per share. It is positive on Infosys' sound strategy, promising long term targets, FY16 guidance and hiring which indicates recovery.


The company's guidance of 10-12 percent growth for this fiscal is better than expectations. However, it is below the NASSCOM guidance of 12-14 percent. The company aims for revenue growth of 6.2-8.2 percent in dollar terms and rupee revenue growth of 8.4-10.4 percent during FY16. Sikka made a statement of intent saying he wants Infosys to lead the industry in terms of growth by FY17. The company has also set itself a target of 20 billion dollar revenues by 2020. 

Maintaining an outperform rating on the stock, Barclays has slashed target price to Rs 2375 from Rs 2500 per share and downgraded FY16-17 EPS by 5 percent. It feels that aspirational guidance of USD 20 billion in revenues by 2020 could be building in a perfect execution of company’s new growth strategy. Betting on the guidance which implies a sharp turnaround, it states that timing of upside dependent revenue acceleration while valuations at 14x FY17 EPS should limit downside.

Kotak also advises to add the stock with a reduced target of Rs 2250 from Rs 2450 per share. It has cut FY2016-17 EPS estimate by 7 percent due to flow through impact of revenue miss and lower other income from higher dividend payout.

IDFC retains outperformer rating with a revised target price of Rs 2520, down 4.5 percent. Stating that stock returns would be back-ended as growth visibility improves over FY16, the brokerage has cut FY15-17 EPS by 4 percent.

Credit Suisse maintains neutral rating with a reduced target of Rs 2100 from Rs 2125. "Disappointing quarter, reasonable guidance but guidance does not seem conservative. There is not much new on the strategy or capital allocation front. Among the larger names, our preference is with TCS. We believe relative outperformance of Infy over TCS could reverse over the next few months," it said in a report.

Meanwhile, Ambit has a sell rating on the stock as it believe that the market is under pricing the risk of a failed turnaround. It is concerned that growth guidance for FY16 appears positive but it is based on the hope of winning new deals rather than on signed orders.

Net profit fell 4.7 percent sequentially to Rs 3,097 crore and revenues dropped 2.8 percent to Rs 13,411 crore in the quarter ended March 2015 because of pricing pressure and lower volumes.

Dollar revenues slipped 2.66 percent to USD 2,159 million in fourth quarter of financial year 2014-15 against estimated growth of 0.3 percent. Net profit in dollar terms dropped 4.6 percent to USD 498 million in the quarter gone by. It is the fourth major IT company in a row to announce disappointing results. Infosys posted 0.4 percent decline in constant currency revenue growth at USD 2,208 million during the quarter, which was far lower than its peers TCS (1.6 percent growth), HCL Technologies (2.7 percent) and Wipro (1.2 percent).

(Posted by Nasrin Sultana)

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