Shares of Infosys dipped 5 per cent to Rs 714 on the BSE in early morning deal after the company reported a lower-than-expected EBIT (earnings before interest and tax) margin for the March 2019 quarter (Q4FY19) at 21.5 per cent. The EBIT margin declined 110bps quarter-on-quarter (QoQ), due to the negative impact of utilisation, ramp up of large deal, S&M (sales and marketing) expenses and localisation and rupee appreciation.
Analysts at Dolat Capital believe that higher sub-contracting cost, higher attrition, implied investment and localisation in the medium term will lead to margin pressure in FY20 for Infosys. "We expect Infosys to report margins towards the mid-point of its guidance in FY20," they said.
The brokerage firm downgraded its earnings estimates by 12 per cent/11.5 per cent for FY20/FY21, primarily because of rupee appreciation and margin headwinds going ahead.
Infosys set FY20 constant currency growth guidance at 7.5-7.9 per cent and operating margin guidance in the range of 21 per cent-23 per cent.
The IT major’s Q4FY19 constant currency (CC) revenue growth at 2.1 per cent/11.7 per cent QoQ/YoY, was in line with Street expectations. Revenue growth was driven by a few select verticals and geographies.
Management is positive on the demand outlook across verticals and geographies and the company has not witnessed any alteration in client spending despite the volatility in the macro environment.
“Led by margin miss in Q4 and company's revision of margin guidance, we cut our margin estimates by 110/100bps to 22.2/22.5 per cent for FY20/FY21E. Our earnings per share (EPS) number is revised downwards to 4.8 per cent/4.2 per cent for FY20/FY21E respectively,” analysts at Antique Stock Broking said in result update.
The brokerage firm believes that with steady revenue growth, benefits from operational efficiency and reduction in sub-contractor cost the margins are likely to recover from the Q4FY19 levels. Stable to improving margin trajectory will act as a trigger for the stock, it added.
At 09:34 am, Infosys was trading 3 per cent lower at Rs 727 on the BSE, as compared to a 0.12 per cent rise in the S&P BSE Sensex. A combined 8.35 million equity shares changed hands on the counter on the NSE and BSE so far.