mployees walk along a corridor in the Infosys campus in Bangalore (Image: Reuters)
Infosys started off trade on a strong note on Friday, rising more than 3 percent after better-than-expected June quarter earnings. However, the euphoria could not last long and the stock lost as much as 0.85 percent before getting settled at Rs 972.05, down 0.44 percent on the BSE.
Profit booking was the one reason, which was obvious because expectations that beat by the company were muted. The other reason could be doubts over sustainability of earnings performance for rest of the year.
"Infosys has clearly put out stronger numbers compared to the disasters in Q3 and Q4. However, revenue momentum in core markets (US, Financial Services, Retail) lacks conviction to suggest that this will continue," CLSA said.
Most of the strength in revenue came from lumpy markets such as India and Rest of World, with persistent softness in the US (up 1 percent QoQ, 4.5 percent YoY), its biggest market.
Deal wins softened to USD 700 million total contract value (13 percent down QoQ and YoY) and stayed dominated by renewals. This along with lack of improvement in constant currency guidance doesn't inspire confidence in future growth outlook, CLSA said.
The research house feels Infosys needs revenue growth to pick up to sustain margins and retain the ability to invest in talent. "We fear that extremely high utilisation may constrain future growth and feel limited incremental margin levers to recover from wage hikes," it said.
With lack of conviction on sustaining growth, limited margin levers and likely pricing pressure from legacy contracts, CLSA remained unconvinced of differentiation and stayed underperform on the stock.
Edelweiss expects 2 percent cut in FY2018-19 earnings largely on change in rupee/US dollar estimate but maintained its add recommendation as the stock traded at inexpensive valuations.
Even as the Infosys' performance has witnessed significant volatility, the research house believes that changes instituted by the CEO are in the right direction.
Edelweiss likes Infosys' strategy on growth, digital and automation with attendant effort changes to delivery and sales (an underperforming area even now) organisations.
Infosys reported solid 2.7 percent revenue growth in constant currency and 3.1 percent in reported currency to USD 2,651 million. Revenue growth was broad-based with India business growing at strong 11 percent in constant currency.
Profit de-grew by 3.3 percent, which was better than analysts' estimates of 5 percent de-growth. EBIT margin of 24.1 percent surprised positively. Margin impact on account of visa and rupee appreciation was offset by 200 basis points improved utilisation and higher realisation of 1.8 percent in Q1.
Infosys retained its FY18 revenue growth guidance of 6.5-8.5 percent in constant currency, implying compounded quarterly growth rate of 2-3.5 percent from Q2-Q4FY18 but raised dollar revenue guidance to 7.1-9.1 percent from 6.1-8.1 percent.