Infosys a buy for most brokerages despite its lower guidance

Mumbai: Most brokerages have maintained a ‘buy’ rating on Infosys though they said the lowering of the EBIT margin guidance for FY19 may be perceived negatively by the market.

The Bengaluru-based company has lowered EBIT margin guidance for FY19 to 22-24 per cent from 23-25 per cent for the previous financial year.

The American Deposit Receipts of Infosys ended down 7.7 per cent on Friday after the earnings, which were released after Indian market hours. Shares of Infosys ended up 0.58 per cent at ?1,169 on the BSE ahead of the earnings.

CLSA
Rating: Maintain ‘buy’

CLSA said a 100 basis point cut to FY19 margin guidance implies an investment of 140 bps or $170 million to catch up on digital capacity, sales coverage, US hiring, generous variable pay and wage hikes brought forward. It sees Infosys’ core earnings growth recovering to high single digits despite the near-term margin investment. CLSA is bullish on Infosys’ stability, returning growth and consistent capital return.

PHILLIP CAPITAL
Rating: Maintain ‘buy’

The brokerage said Infosys’ FY19 margin guidance was a major disappointment but it derives solace from the fact that the margins are being sacrificed to secure future growth. It remains positive on the company due to improving business metrics and the significant valuation gap versus TCS. Phillip Capital said it is difficult not to believe that the decision to sell Panaya and Skava is being taken to pacify one minority investor at the expense of growth prospects, and interest of other minority shareholders.

EDELWEISS
Rating: Maintain ‘buy’

Edelweiss said Infosys’ lower margin guidance and softer-than-expected commentary are likely to be perceived negatively by the market. Edelweiss has cut FY19 and FY20 EPS estimate by 0.7 per cent and 4.2 per cent respectively as investments in building sales and digital capabilities will lead to margin dilution and the ?130-billion payback to shareholders reduces other income. Edelweiss has maintained ‘buy’ on Infosys due to strong momentum in deal wins, digital-focused strategy, undemanding valuations and high dividend yield.

KOTAK INSTITUTIONAL EQUITIES
Rating: Maintain ‘add’

The brokerage said Infosys’ revenue growth guidance of 6-8 per cent signals acceleration in growth. Strategic priorities have caused Infosys to cut margin guidance band which is disappointing but necessary to build muscles in digital business. Because of the margin reset, the brokerage has cut FY19-FY20 earnings estimates by 1.1-1.4 per cent but it remains positive on Infosys as key revenue metrics are comforting. Kotak said Infosys’ valuations at 14.7 times FY20 estimated earnings are attractive.

IDFC SECURITIES
Rating: Maintain ‘Outperform’

The brokerage said revenue guidance is in line with expectations but the market will find the soft margin outlook disappointing. IDFC Securities said Infosys’ valuations are still reasonable. It has retained positive view on Infosys as it believes that execution-focussed leadership should drive convergence of growth with the industry. It also finds valuations inexpensive.

ELARA CAPITAL
Rating: Maintain reduce

Elara said Infosys’ new EBIT guidance band of 22-24 per cent confirms fears that the firm is running out of margin levers. The decision to divest Panaya and Skava suggest that the commitment to platforms strategy, pursued under Vishal Sikka, is wavering. It is worrying that this undermines the credibility of offering any platforms to clients in future. The brokerage said investors should switch to TCS and HCL Technologies’ stock.