Why there could be more trouble ahead for Infosys

Moneycontrol Bureau

Shares of India's second largest IT firm Infosys fell nearly 2% in early morning trade after Cowen & Co cut the stock to Neutral from Outperform, on disturbing IT survey results and increased competition from International Business Machines (IBM) and Accenture (ACN).

Speaking to CNBC-TV18, Cowen & Co's Moshe Katri said directionally the survey showed better or stronger readings for the global IT space. But for Infosys, the level of existing clients’ intention to spend was much weaker than its tier I peers. This has happened for the first time since Cowen has been conducting the survey, Katri said.

Other aspect where Infosys scored poorly was new client’s intention to spend more or less with Infosys. At this point Infy are still not getting enough traction to able to get to that revenue growth recovery that Cowen was been hoping for. “This is not to say that Infosys will not get it right, it just feels that the revenue growth recovery is just going to get protracted as we go along,” Katri told CNBC-TV18 in an interview.  

Another major reason for the downgrade has been that international IT venders have started to look as economical as Infosys and other Indian IT companies who are yet to show any signs that they are ready to sacrifice on pricing. Katri said this will mean more competition in days to come.

Also read: Infosys makes way for Facebook in Nasdaq-100 index

Infosys, which is down 11% since September, has been hit by a slew of downgrade this year. CLSA downgraded the software services exporter to 'Underperform' from 'Outperform,' with a 12-month target price of Rs 2,630. "Mishaps on the HR front, a protracted re-organisation and continued operational slip-ups, all in the past 18 months has invariably raised the bogey of Infosys is losing its magical operational excellence," said CLSA in its report.

Meanwhile, Deutsche Bank had cut the stock to 'Hold' from 'Buy', with a revised target price of Rs 2,400, while Macquarie also downgraded the stock to "Neutral", but with a target price of Rs 2,450.

Deutsche Bank said Infosys' rivals Tata Consultancy Services and Wipro were "best positioned to deliver value" given clients in the sector are facing budget constraints on their spending.

At 11:34 hrs Infosys was quoting at Rs 2,390.10, down Rs 39.20, or 1.61%.