Infosys falls 6% in morning trade post Q4 show; brokerages remain mixed

The sequential drop in fourth quarter profit was because Q3 included the positive impact of $225 million due to conclusion of an advance pricing agreement (APA) with the US Internal Revenue Service.

The management guided for a 6-8 percent growth in its full year constant currency revenue and 7-9 percent growth in dollar revenue, which was in line with analyst estimates.

Also Read: Infosys net profit at Rs 3,690 crore; 10 key takeaways from Q4 results

However, it revised its EBIT margin guidance downwards to 22-24 percent from 23-25 percent. This will include impact from the revised compensation for FY19.

Infosys announced that it had entered into a definitive agreement to acquire WongDoody Holding Company, a US-based digital creative and consumer insights agency, for a consideration of $75 million.

Global and domestic brokerages remain mixed about the results as some of them have been surprised on lowering of margin guidance. Brokerages such as Jefferies have hiked their target to Rs 1,340 per share from Rs 1,000 per share earlier, an upside of 34 percent, citing favourable risk reward. However, Citi has maintained its neutral stance on the stock, reducing its target price to Rs 1,195 per share.

Brokerage: Kotak Sec | Rating: Retain Add | Target: Rs 1,250

The brokerage observed that Infosys had a steady Q4 with stable operating metrics and impressive margin defence. Further, revenue growth guidance of 6-8 percent is consistent with our expectations, it said, adding that strategic priorities have caused cut in margin guidance band to 22-24 percent. The margin reset is also driving 1.1-1.4 percent earnings cut for FY19-20.

Brokerage: B&K | Rating: Underperform | Target: Rs 1,150

The research firm observed that revenue guidance of 6-8 percent in constant currency belies Street’s hopes of growth recovery. Further, disposal of Panaya & Skava may lead to more impairment losses, he said, adding that capital allocation is the only redeeming factor.

Brokerage: Edelweiss Sec | Rating: Buy | target: Cut to Rs 1,419 from Rs 1,475

Edelweiss has maintained the company as a top pick in this space. It said that the margin guidance was cut to 22-24 percent due to digital investment and will help the company gain market share. It also said that deal momentum was strong for the firm.

Brokerage: Elara | Rating: Reduce | Target: Raised to Rs 1,120 from Rs 1,090

The broker observed that limited margin levers going into the next fiscal were expected. In fact, it revised earnings estimates for the upcoming fiscal, with margins rising by 30 basis points, while PAT estimates are seen higher by 2.4 percent and 0.7 percent for FY19 and FY20, respectively.

Brokerage: Emkay | Rating: Reduce | Target: Unchanged at Rs 970

Emkay said that the firm would achieve growth closer to the lower end of guidance. It expects earnings CAGR of over 5.5 percent over FY18-20. Further, the new strategy could help growth but, pressurise profitability.

Brokerage: HDFC Sec | Rating: Buy | Target: Rs 1,300

HDFC Securities said that investments are likely to lead on to quality growth. It reiterated a positive stance on the stock due to scalability & momentum in large accounts. The brokerage also expects revenue/EPS CAGR of 8.6/7.6 percent over FY18-20, while EBIT margin is seen at 23.8/24 percent in FY19/20.

Brokerage: IDFC Sec | Rating: Outperform | Target: Unchanged at Rs 1,250

IDFC Securities said that overall it was an in-line quarter with no surprise on guidance. It believes that soft margin guidance outlook could disappoint the Street. Having said that, it believes valuations are reasonable, with no earnings downgrade despite this modest outlook.

Brokerage: Motilal Oswal | Rating: Buy | Target: Rs 1,330

The equity research firm cut the earnings estimates by 2 percent for FY19/20, and said that the lower end of margin guidance of 22 percent is conservative. It also said that the capital allocation lends valuation support.

Brokerage: PhillipCap | Rating: Buy | Target: Rs 1,300

The brokerage said that FY19 margin guidance was a major disappointment and disposal of Panaya & Skava was a surprise. Going forward, it remains positive on improving metrics and significant valuation gap against TCS.

Brokerage: Prabhudas Lilladher | Rating: Buy | Target: Rs 1,220

Prabhudas Lilladher said that constant currency growth was below estimates & margin was above estimates. It highlighted that tepid growth in developed markets is also a concern.

Brokerage: Axis Cap | Rating: Buy | Target: Rs 1,340

Axis Capital said that the firm’s revenue guidance was in line, while margin guidance cut could accelerate investments. It sees USD 2.5 billion plus capital allocation to cushion downside risk. It recommends buying the stock on declines.

Brokerage: CLSA | Rating: Buy | Target: Unchanged

The global research firm said the Q4 revenue was in line, but margins were ahead of its estimates. Its FY19 dollar revenue guidance is strong at 7.9 percent year-on-year. It said a 100 basis points cut to FY19 margin guidance implies investments of 140 bps, which allows the company to re-accelerate by refocusing strategy and gaining market share. Going forward, it expects the company to catch up with peer growth rates.

Brokerage: Citi | Rating: Neutral | Target: Cut to Rs 1,195

Citi sees Infosys' EBIT margin guidance of 22-24% as a negative surprise. It has revised downwards its EBIT estimates for FY19/20 by 2 percent.

Brokerage: Jefferies | Rating: Buy | Target: Raised to Rs 1,340 from Rs 1,000

The global research firm believes the risk-reward is favourable. It sees growth accelerate over FY19-21. The stock, it said, is trading at a reasonable valuation.

Brokerage: Credit Suisse | Rating: Neutral | Target: Rs 1,100

The Swiss global research firm said Infosys Q4 revenue growth at 0.6% was below its estimate of 1%. In fact, Q4 margin was higher than its expectation by 20 bps. However, it believes the company's margin guidance was disappointing.

Brokerage: Macquarie | Rating: Outperform | Target: Rs 1,250

Macquarie said the lower-end of margin guidance will help growth in the medium-term. It has raised its target multiple due to capital allocation and revenue outlook. The company is one of its top picks in the IT space.

Brokerage: Morgan Stanley | Rating: Overweight | Target: Rs 1,300

The US investment bank said the negative margin outlook can be partially offset by capital allocation. It expects the stock to pare some gains.

Brokerage: Nomura | Rating: Reduce | Target: Rs 990

Nomura said the cash return of over $2 billion could cushion a fall, but expects the stock to react negatively on account of the cut in its margin guidance.