Infosys: Analysts keep the faith despite the disappointing Q4 show

Street expects an upward revision in growth guidance; valuation divergence with TCS to narrow

A miss on the March quarter performance and valuations weighed on the Infosys stock which shed about 3 per cent trade on Thursday. The disappointment was largely due to the high expectations built in into estimates after the consistent outperformance on growth and deal wins over the previous quarters. While constant current growth of 2 per cent in the quarter fell short of the 3-4 per cent estimate, the growth guidance of 12-14 per cent for FY22 too was a shade below what analysts had forecasted.  

Though there could be near-term pressure on the stock, the street remains bullish given demand momentum, deal pipeline and expectation of an increase in growth guidance in the coming quarters.

Brokerages believe the company will revise its guidance during the course of the year. Highlighting this Edelweiss Research says that the company ended FY21 with 5 per cent revenue growth, much higher than the 0-2 per cent it had guided in Q1FY21. This, according to them, indicates that substantial conservatism is built into the outlook.

While the guidance is for FY22, Pankaj Kapoor of CLSA believes that it could hold true for the long term given the management commentary about demand outlook ‘being one of the strongest’. CLSA also highlights that reported growth at 2 per cent is masking the strong business momentum--a 4.6 per cent q-o-q volume growth is a 10-year high for the quarter and net new order book of $1.1 billion is up 20 per cent YoY.

While growth is a given, there could be margin headwinds in the form of wage hikes in the September quarter, impact of large deal transition and reversal of discretionary spends such as travel. Analysts however believe the company will be able to achieve its 22-24 per cent margin range for FY22. Given the pressures, the company has been conservative with its guidance after reporting a margin of 24.5 per cent in the March quarter.

After a bit of correction, the stock trades at 21 times its FY23 earnings estimates as compared to TCS valuation of 24.5 times. Given the outlook and FY21 outperformance of Infosys over TCS analysts expect the divergence to narrow.