Infosys Rating: Margin miss was key disappointment

By: |
New Delhi | Published: April 20, 2019 12:57:43 AM

Growth outlook remains positive; estimates cut to reflect lower margin over FY20-21; TP revised to `835; ‘Buy’ maintained.

infosys, infosys ratings, stock marketsInfosys’ track record suggests it has consistently delivered close to mid-point of initial margin guidance.

The key disappointment in Infosys’ Q4 result was miss in margin (Ebit at 21.4%) even against muted expectations (22.1% vs. 22.6% in Q3) though FY20e guidance of 21-23% was in line and suggests scope for improvement. Revenue growth at 2.1% q-o-q & FY20e growth guidance of 7.5-9.5% were also slightly lower; however, strong deal TCV of $1.6bn/6.3 bn in Q4/FY19 vs. $3.1 bn in FY18 and robust demand environment for digital services keeps us optimistic on growth.

Miss on multiple fronts in Q4

Infosys’ Q4FY19 results missed expectations on multiple fronts: (i) revenue growth of 2.1% q-o-q const. ccy was slightly weaker than our estimate of 2.5%; (ii) FY20e growth guidance of
7.5-9.5% y-o-y const. ccy was also tad lower than expectation of 8-10%; (iii) the biggest disappointment was Ebit margin at 21.4% well below already muted expectation of 22.1% implying sharp 120bps decline q-o-q. It also announced a final dividend of `10.5/share taking full year dividend to `21.5; buyback of `82.6 bn is in progress.

Deal win momentum continues, growth outlook remains positive

The miss in Q4 growth was mainly on account of client-specific issues as per management. High large deal TCV of
$1.6 bn in Q4/$6.3 bn in FY19 (vs.

$3.1 bn in FY18) and strong demand environment for digital services despite macro headwinds gives us confidence that Infosys will deliver double-digit y-o-y growth in FY20e. Even in FY19 it achieved 9% y-o-y growth vs. initial guidance of 6-8%.

Expect margin improvement in FY20e

Management attributed 120bps q-o-q margin decline to (i) -70bps due to lower utilisation; (ii) -40bps due to large deal ramp-up (rebadging in Verizon);
(iii) -30bps for higher investment;

(iv) -30bps INR appreciation partly offset by (i) +40bps lower provision and

(ii) +40bps one-offs in Q3. Investment in sales has been completed and localisation effort in US is close to target of 10k. Utilisation decline, high sub-contracting expenses is a result of strong demand and should improve over time. We expect INR depreciation to remain a tailwind. Infosys’ track record also suggests it has consistently delivered close to mid-point of initial margin guidance. As a result, we expect margin improvement in FY20e against Q4 base, post wage hike impact in Q1.

Cutting estimates, maintain Buy

We cut estimates to reflect lower margin of 22-22.5% over FY20-21e vs.23-23.5% earlier which is partly offset by better growth. Our price target, based on 18x FY21e, increases slightly to `835 (prev. `820) as we also roll forward our estimates by a quarter. We maintain Buy rating on the stock as we expect growth momentum to continue.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition