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Last Updated : Oct 14, 2019 10:07 AM IST | Source: Moneycontrol.com

Infosys Q2: Numbers broadly in line, but challenges ahead; here's what brokerages say

Credit Suisse has an 'underperform' call on Infosys with a target price of Rs 690 due to high valuations and an expectation of a weaker second half of FY20.

 
 
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Shares of IT major Infosys fell over 4 percent on October 14 on the company's softer July-September quarter numbers.

The company, on October 11, reported a 5.8 percent sequential growth in Q2 FY20 with its net profit at Rs 4,019 crore.

Revenue during the quarter rose 3.8 percent QoQ to Rs 22,629 crore. The same in dollar terms rose 2.5 percent at $3,210 million, in line with a CNBC-TV18 poll of $3,220.7 million. Year-on-year (YoY), core revenue declined by about 2 percent.

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Brokerages and analysts have come out with mixed reviews of the company's Q2 performance.

"Post the Q2FY20 numbers, we have largely maintained our expectations of 10 percent revenue growth for FY20 and FY21 while 7 percent and 14 percent growth in net profits for FY20 and FY21. EBIT margins are expected to be around 21.9 percent for FY20 and 22.8 percent for FY21," said Vineeta Sharma, Head of Research at Narnolia Financial Advisors.

"Infosys has suffered the pain of lowering margins and reduced growth due to increased subcontracting and localisation expenses, high attrition and changes in business strategies in the recent past. We expect the margin cycle to now reverse in the favour of the company as the investment cycle has peaked for the company," she said.

Sharma, however, highlighted that the macro challenges in financial services, manufacturing as well as retail cannot be ignored.

"We remain positive on the company but at the same time remain cautious on the macro environment. Post results, with stable organic and inorganic growth expectations going ahead, we have raised our target price slightly to Rs 927, valuing the stock to forward 21 times FY21 EPS," she said.

Harit Shah, a Senior Research Analyst at Reliance Securities, said the Q2 numbers of Infosys are largely in-line, with revenue marginally disappointing. But, bearish commentary on Financial Services going forward is a negative factor.

Ajit Mishra, VP Research at Religare Broking believes the company has reported a healthy set of numbers.

"Raising revenue guidance is definitely an encouraging sign and should be taken positively by the market," Mishra said.

Domestic brokerage firm Kotak Institutional Equities has maintained an 'add' rating on Infosys with a target price of Rs 840.

The brokerage said while Infosys reported broadly in-line quarterly numbers, demand has pockets of weakness that lead to growth moderation in FY21 so the stock returns will moderate hereon.

Credit Suisse has an 'underperform' call on Infosys with a target price of Rs 690 due to high valuations and an expectation of a weaker second half of FY20.

The global brokerage has cut FY20-22 earnings per share (EPS) estimates for Infosys by 2-5 percent on higher-than-expected retail weakness.

HSBC has a 'hold' rating on the IT major with a target price of Rs 800. The global financial firm said, while in line earnings and strong deal wins are positives, no upgrade in top-end of guidance is disappointing.

"FY20 estimates are already rich. Banking and retail demand trends show clear deceleration and near-term earnings surprises are unlikely," HSBC said.

Citi has maintained a 'buy' recommendation on Infosys with a target price of Rs 900.

Citi said while the macro is tough, continued momentum and execution should provide some comfort, however, the recent uptick in the stock may cap near-term upside.

"The company's positioning as a defensive stock in India is good and the stock is one of our big overweights in India model portfolio," Citi said.

Jefferies, too, has a 'buy' recommendation on Infosys with a target price of Rs 915.

Jefferies said the Q2 numbers were largely in line and the slight miss in revenue growth was offset by marginal beat in the margin.

"The company remains one of the best-placed amongst the top tier IT companies and will be benefitted from the tailwind of large-scale digital transformation," Jefferies said.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Oct 14, 2019 10:07 am
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