Why Infosys is Under Pressure Despite Record Deal Wins, Faster Growth
Infosys shares, which hit a record high of Rs 1,219 on Monday, are down for a second straight day. On Tuesday, Infosys shares tumbled over 3 per cent, having ended 4 per cent lower in the previous session. The selloff in Infosys is surprising because the company beat Street expectations on nearly all counts - topline (constant currency revenue) growth of 6.9 per cent (sequential) was the best in last 16 quarters, new deal wins - amounting to nearly $1 billion in total contract value - were the highest for any quarter, and operating (EBIT) margins of 25.5 per cent was also ahead of estimates. Kotak Institutional Equities' Kawaljeet Saluja described Infosys' earnings as a "picture perfect" quarter.
So, why are Infosys shares under pressure?
1) Despite two quarters of outperformance, Infosys retained its 2015-16 constant currency revenue growth guidance at 10-12 per cent. This implies that the company will post tepid growth in Q3 and Q4 again, analysts say. Over the last 2-3 years, Infosys has been reporting subdued performance in the second half (H2) of the fiscal year.
"The weak 2HFY16 revenue guidance has spoilt the party for investors. It is difficult to fathom whether this is because of conservativeness or whether the management is being realistic," wrote Girish Pai of Nirmal Bang Securities.
2) Citigroup said the lack of "profitable growth" continues to be its biggest concern on the IT sector. Infosys reported only 2 per cent year-on-year growth in US dollar profit, it added. Domestic brokerage Nirmal Bang said a further uptick in margins from the current level (25.5 per cent) is unrealistic.
"We believe Infosys is gaining market share by bidding aggressively... The aggressive bidding by Infosys and some of its peers is leading to cannibalisation of revenues for the entire industry," Nirmal Bang said.
3) UBS, one of the big investment banks, maintained "sell" on Infosys citing high valuations. The performance in the September quarter represents "peak" for fundamentals in the medium term, it said, adding that a weak performance in the March (Q4) quarter could impact consensus revenue forecasts for FY17. Credit Suisse, which has a "neutral" rating on Infosys, said it will be a tough ask for the company to achieve somewhere close to industry leading growth in FY17 with a weak base.
- 4) The surprise resignation of Chief Financial Officer Rajiv Bansal, the second big senior management exit in the last three months after Sanjay Jalona (head of manufacturing), also added to the negative sentiment in the stock, analysts say. "Senior management attrition is the risk to watch out for," said Kotak Institutional Equities.
5) Infosys shares outperformed both the IT sector sub-index and the broader Sensex in the last three months, so some profit taking after a solid quarter is understandable, analysts say. "This correction has more to do with the fact that the stock had run up sharply," said market analyst Sharmila Joshi.