Is it a good time to buy Infosys?

The stock hit an eight-month low after one of its key clients, RBS, decided not to pursue its plans for a separate bank

Royal Bank of Scotland’s (RBS’) last week’s decision of not pursuing its plan to separate and list a new bank – Williams & Glyn (W&G) – hit Infosys in trade on Tuesday with the stock plummeting 3% in intra-day deals to its eight-month low of Rs 1,028 levels on the National Stock Exchange (NSE). 

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Since then, it has recovered and is trading at Rs 1,046 levels, down nearly 1.5% around noon deals. By comparison, the Nifty 50 index was trading lower by 0.7% at 8610 levels, while the Nifty IT index slipped 1.3% to 11,029 levels.

Given the RBS’ decision, Infosys would see a ramp down of around 3,000 resources. The likely impact on revenue could be around $50 million, reports suggest. This comes at a time when Infosys recast its annual revenue guidance for FY17 while announcing its results for the June 2016 quarter to 10.5 – 12% in constant currency (CC) terms, as against a market expectation of 11.5 – 13.5%.

While the decision dented sentiment on Tuesday, analysts had already warned regarding such Brexit-related shocks.

Analysts at Nomura, for instance, had cautioned in their July report that the Brexit impact are not incorporated in the guidance and could cause downside risks going ahead.

“While the company has not seen any delay in decision making on account of Brexit, it remains cautious in the near-term given the potential for a high degree of volatility and uncertainty across industries, especially in the financial services which could lead to softer demand in the coming quarters as companies decide on their future strategy regarding the UK and Europe. However, over the longer term, the company sees possibility of additional opportunities,” wrote Ashwin Mehta and Rishit Parikh of Nomura in their July post Q1 result report on Infosys.

IMPACT

Given the development, analysts see risks to Infosys's revenue and margin outlook not only for FY17, but for FY18 as well. They expect the management to revise their full-year FY17 guidance again going ahead.

“While reports say this ramp-down will impact Infosys's FY17 revenues by $30 – 40 million, our rough cut calculations imply a revenue loss of $70 – 80 million in FY17 and around $150 – 200 million in FY18. This will be a further headwind to Infosys's revised FY17 guidance of 10.5 – 12% (CC) revenue growth by around 70 – 80 basis points (bps)," says Manik Taneja, an analyst tracking the company at Emkay Global.

“We would not be surprised to see Infosys cutting its revenue guidance further by September 2016 quarter results, which could also mean that Infosys’s EBIT margin outlook (25%+/- 100 bps) could also see a downward revision in the near term. We continue to back our downside risks to modest growth expectations' thesis on the sector with Q1FY17 results reflecting that the sector is headed for a rough FY17 and most likely H1FY18,” he adds.

STOCK STRATEGY

So what should you do with the stock then? Is it a good buy at these eight-month low levels? 

Given the uncertainty surrounding Brexit and its impact on the global economy and corporate earnings, especially in the information technology (IT) sector, analysts remain cautious on this space.

“The stock has already corrected a lot and is trading at a price-to-earnings (PE) multiple of around 14.5x FY18 earnings. I think this is an attractive valuation for someone who wants to enter the stock from a long-term perspective,” explains G. Chokkalingam, founder & managing director, Equinomics Research & Advisory.

“Having said that, one must also realise the fact that there is not much money to be made in large-cap information technology (IT) stocks in the near-term, as there are growth issues w.r.t Europe and there is a currency uncertainty due to Brexit. The only silver lining is an uptick in the US economy, which can prove to be a cushion given the developments in Europe. Most IT stocks, including Infosys, at best are good defensive plays,” he adds.