Infosys Q1: Should you buy the stock?

Infosys rallied nearly 15% in morning deals on the National Stock Exchange (NSE) to Rs 1,149 levels, after the company announced a net profit of Rs 3,030 crore for the first quarter ended June 2015, down 2.16% on a sequential basis.

Revenue during the period, however, grew 12.4% to Rs 14,354 crore year-on-year (y-o-y), and was above estimates. The company posted a 4.5% q-o-q growth versus 4% sequential growth in US dollar revenues to $2,256 million.

The constant currency growth (CC) was around 4.4% during the period, mainly driven by a 5.4% volume growth (highest in 19 quarters).

""Infosys’ results beat our estimates on the revenue front, with margins coming in line with estimates. The highlight of the results was the strong CC revenue growth, led by volume growth of 5.4%. The volume growth was the best in the past 19 quarters," said Dipen Shah, Head of Private Client Group Research, Kotak Securities.

"Infosys has achieved significant progress in its quest of ‘New and Renew’ with extensive training of employees and implementation of projects in emerging areas including Design Thinking, Artificial Intelligence and Automation. On the other hand, the reorganisation of the client-facing initiatives is leading to deeper penetration among the large clients while increasing to the client count as well. These investments should help Infosys sustain and improve growth rates in the future while sustaining margins it its stated band. We maintain our positive stance on Infosys," he adds.

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In a preview note, analysts at Nomura had expected a US dollar (CC) revenue growth of 2.2% q-o-q; EBDITA margin decline and a net profit decline of 3% q-o-q.

“US$ revenues may grow 2.5% q-o-q to $2,213 million led by a pick-up in manufacturing, BFSI and retail spending. Rupee revenues may grow 4.6% q-o-q to Rs 14,024 crore helped by ~1.8% inter-quarter depreciation in the average rupee rate relative to the dollar. EBIT margins may decline 150 bps q-o-q to 24.2% led by wage hikes, promotions, visa expenses and onsite investments partially offset by forex tailwinds. Investor interest: Large deal TCV signings, outlook across verticals and geographies, acquisitions pipeline and attrition,” an ICICI Securities earnings preview report had suggested.

Stock Strategy

Given the near 15% rally in the stock today given the Q1 results, should you stay invested?

Ajay Bodke, CEO & chief portfolio manager - PMS at Prabhudas Lilladher Group believes that the company has done well on several counts in the recently concluded quarter. The stock remains is top pick in the Indian information technology (IT) space.

“There are a lot of positives. The first is the strong volume growth. What also stands out is the drop in attrition and an improvement in utilisation. Commentary on guidance is also a key positive. All this reinforces investor’s belief in the ability of Dr Vishal Sikka to chart a new course for the company and his assurance that Infosys’ growth will be higher than the market growth. Investors will now also focus on the aspiration that Dr Sikka has clearly spelt out of becoming a $20 billion company in revenues by 2020,” Bodke said.

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“We inherently believed in Dr Sikka’s ability to turnaround the company and the stock has been one of our top picks in the IT sector,” he added.

Sarabjit Kour Nangra, vice-president for IT research at Angel Broking also maintains BUY rating on the stock with a target price of Rs 1,315 – an upside of around 15% from today’s high.

However, G. Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory believes that the stock has over-reacted to the results and has sun up sharply. He expects the stock to correct 5 – 10% from the current levels and suggests short – term investors’ book profit in the counter.