Infosys has no reason to worry

Given its revenue projection and improvement in deal wins in FY16, analysts remain positive

The slight caution sounded by Infosys’ chief operating officer (COO) U B Pravin Rao in a recent analyst interaction saw the stock fall 4.3 on Thursday. Rao said Infosys’ operating margin would be impacted by 150-200 basis points in the ongoing quarter thanks to wage hikes and visa costs. However, Infosys typically implements wage hikes in the June quarter of a financial year; so, this seasonality is a well-known fact. Infosys’ operating margin stood at 25.5 per cent in the March 2016 quarter, and 25 per cent for FY16. For FY17, too, Infosys expects to maintain margins of around 25 per cent.

Rao indicated that Infosys is witnessing signs of slowdown in verticals such as retail, health care and life science wherein companies have reported weak results recently. Although the company is watching these developments closely, Infosys’ FY17 constant currency revenue growth guidance of 11.5 to 14.5 per cent stays.

Nevertheless, most analysts remain bullish on Infosys and are not taking these comments seriously. “We are not sure whether the COO’s words have to be taken at face value, as such cautionary statements have also been issued in the past, with little impact on quarterly numbers,” said Girish Pai, analyst at Nirmal Bang Securities.

This is corroborated by the improvement in Infosys’ recent quarterly performance. The company witnessed a handsome 45 per cent increase in large deal win values in FY16 and it expects to post industry-leading revenue growth in FY17. The company's top 10 clients continue to witness healthy traction. However, analysts believe it has to post 4.5 to five per cent revenue growth in the first and second quarters of FY17 to achieve the full-year guidance, as the second half is seasonally weak for information technology companies.

Sagar Rastogi, technology analyst at Ambit Capital, says, “No client has cut its budget for Infosys and the company has reiterated the FY17 revenue guidance. Hence, we think there is no reason to worry. Peers such as TCS (Tata Consultancy Services) should also not see any impact as the management commentary continues to be positive.” He is positive on both Infosys and TCS, but believes the former can offer slightly higher stock price returns going forward as it is trading at a reasonable valuation of 19 times one-year forward estimated earnings.

Part of the Thursday’s fall could also be attributed to some profit-booking given that the stock made an all-time high of Rs 1,278 on June 3.