Infosys Q4 2017 results: Experts welcome dividend policy, but worry on EBIT guidance

Sector experts welcomed Infosys’ new capital allocation policy announced with its fourth quarter earnings Thursday, but sounded a note of caution on the cut in margin guidance.

Software services exporter Infosys on Thursday reported profit at Rs 3,603 crore for January-March quarter, a decline of 2.8 percent against Rs 3,708 crore in previous quarter. Revenue fell 0.88 percent to Rs 17,120 crore compared with Rs 17,273 crore previous quarter. It also trimmed EBIT guidance to 23-25 percent.

Lowering of margin guidance stems largely from the concern over the impact of change in US H1B policies and cross-currency headwinds.

"The big issue is really margins. We went from original margin range of 24-26 percent, then 24-25 percent, and now we are at 23-25 percent. So obviously we can speculate here that these are pricing compression - is it a fact," said Moshe Katri sharing his views with CNBC-TV18.

The company announced increase in dividend pay out to 70 percent of free cash flows from 50 percent earlier. It also said it will pay out up to Rs 13,000 crore in FY18 either in dividends or via a buyback or a mix of both.

Experts pointed out that this relatively less than the Rs 16,000-crore purely in buybacks announced by TCS.

BSE and NSE member Dipan Mehta, however, believes there is absolutely nothing positive in the earnings for investors to get interested in the company’s stock.

While it is good that the company is moving towards international standards in terms of payout, the real challenge is in terms of revenue and margins and until that improves the stock could stay in a range, experts said.

The stock is trading at historic low valuations currently at about 15 times FY18 earnings.

"Infosys is not a growth stock anymore and I think that still what the market is hoping for and it is just not going to get it going forward," said Andrew Holland, CEO of Avendus Capital Alternate Strategies.

"The whole model for them has broken and that is what you are seeing in terms of the earnings and if you throw in the rupee headwind for them then the stock could easily fall 10 percent before it is even worth looking at," Holland said in an interview to CNBC-TV18.

Below is the verbatim transcript of Moshe Katri’s interview.

Latha: The Infosys numbers are in-line at best for the current year. 24.6 percent EBIT margins, and almost delivering on the 1.3 percent dollar revenue growth, but guidance cut to 23-25 percent in terms of margins and growth cut to 6.5-8.5 percent. What are your first thoughts?

A: Couple of things from our perspective. I took a very quick look at some of the metrics, it seems that the slight US dollar miss has been a function of the fact that India was down almost 7 percent sequentially after the quarter; that is number one. North America was up 120 percent, that is the bright spot.

In terms of the verticals, the two best performing verticals were financial services and energy and then you continue to see deceleration in growth in some of the legacy services such as application development, etc. That is not a huge surprise and that is part of this whole theme about secular challenge that the whole industry is going through.

The big issue is really margins. We went from original margin range of 24-26 percent, then 24-25 percent, and now we are at 23-25 percent. So obviously we can speculate here that these are pricing compression - is it a fact. I think this something we need to kind of dig deeper into. If it’s simply a fact, you can explain that and I think people probably will get a bit more comfortable here.

I did see some statements in the context of execution issues during the quarter and I don’t know what that means, are we talking specifically about contract specific issues, especially some of the large deals that the company has been winning, because if that is really the issue, that does not go away very quickly.

So, our main concern is margin guidance. The topline growth guidance can be adjusted. I think a lot of that is a function of demand and at this point it doesn’t seem, based on what we are seeing out there, it doesn’t seem that demand is an issue at least this year from a cyclical growth perspective, my focus is really on margins and we need to dig deeper and get some details on that.

Latha: Would you want to say something about the capital deployment policy, an additional payout of USD 2.5 billion through dividends and payback and the revised payout now rises to 70 percent of the free cash flow?

A: I always think that companies in this space especially given the challenges that they are going through have to be I would say very strategic and very disciplined in terms of what they do in terms of cash deployment because you have to invest in the business and on the other hand, returning cash to shareholders makes also a lot of sense just because again this is a high free cash generating kind of industry.

So, I am assuming the company is doing what it is doing from a strategic perspective. What I do care about is what are they doing to make sure that they are relevant to their clients and in order for them to transition away from the legacy services into digital and that is the big deal here.

Sonia: What do you do with the stock now, because on one hand, valuations are at historic lows trading at about 15 times FY18 and on the other hand there is no growth visibility? Do you think that the upside for this stock would be capped in the near term?

A: We have a neutral rating on the stock and at this point I think we are kind of stuck here in a trading range until we get a better feel on margin or margin direction again. We will see what the management has to say about some of the factors that are impacting margins and for me that is going to be a big deal.

Latha: What will you expect to hear from the management speak?

A: I want to hear an explanation, try to understand exactly the multiple factors that are impacting the margin guidance for the story. That is probably the biggest issues for me.