Infosys, India’s second-largest IT services provider, suffered a major blow on Monday after its shares logged their worst single-day loss since 2019. The heavyweight Sensex stock, which was the biggest drag on the index, crashed up to 12.2% on BSE, hitting a 52-week low at Rs 1,219. Meanwhile, on NSE, the stock nosedived 15% to hit the day's low at Rs 1,185.30. In this blog post, we will take a closer look at the track record of Infosys, analysts’ views on the company’s Q4 results, and the impact of the stock’s fall on the market.
Track Record
Infosys has had a long history of success in the Indian stock market, and its track record is one of enviable consistency. The IT giant has seen its shares rise steadily since it was founded in 1981, and it remains one of India’s most valuable technology companies.
However, the Infosys share price suffered a significant drop on Monday, logging its worst single-day loss since 2019. Analysts called the company’s Q4 results “shocking” as the stock crashed up to 12.2% on BSE during the day, hitting a 52-week low at Rs 1,219. On NSE, the stock nosedived 15% to hit the day's low at Rs 1,185.30. This marked only the eighth time in 20 years that Infosys shares have recorded double-digit losses (on a closing basis).
It is worth noting that this downturn follows a period of strong growth for Infosys – from April 2020 to February 2021 its stock rose by more than 50%. However, analysts have suggested that too much reliance on cost cutting may have contributed to the recent fall in share prices as investors are now looking for more revenue growth from tech stocks such as Infosys.
In terms of other performance metrics, Infosys continues to be among India’s top IT firms with an impressive compound annual growth rate (CAGR) over five years of 17%. Its operating margin stands at an impressive 25%, and its return on equity is currently 11%. With these financial metrics combined with consistent dividend payments over many years and attractive valuations relative to peers across sectors, it is clear why investors remain interested in Infosys despite Monday’s sharp drop in share prices.
During the period, Infosys'
During the period, Infosys shares logged their worst single-day loss since 2019. As analysts called the IT giant's Q4 results "shocking", the heavyweight Sensex stock nosedived 12.2% on BSE and 15% on NSE, hitting a 52-week low of Rs 1,219 and Rs 1,185.30 respectively.
This was not an isolated incident – in fact, it was only one of eight times in the last two decades that Infosys stocks had suffered double-digit losses (on a closing basis). Investors were evidently rattled by the company’s poor performance and outlook for FY2021, which saw net profit decline 7.6%, revenue growth decelerate to its slowest rate in four years, and margins shrinking to their lowest level since 2016-17.
The third quarter results have undoubtedly sent shockwaves through India’s IT sector as investors worry that Infosys may be facing a sustained period of underperformance compared to its major rivals such as TCS and HCL Technologies. Although most brokerages maintained their ‘buy’ ratings for the stock following Monday’s fall, many revised down their price targets from ₹1,400-1,500 to ₹1,100-1,200 range due to concerns about weak demand from banking clients and lower than expected guidance for FY 2021.
Analysts point out that despite having one of the highest cash reserves among all Indian IT companies at ₹48K crore (as on 31st March 2020), Infosys is still struggling with business continuity plans amid increasing uncertainty over global economic conditions due to Covid 19 pandemic. The uncertain environment has made it difficult for companies like Infosys to provide accurate guidance on future growth prospects while also putting pressure on margins as they try to contain costs in order to remain competitive against rivals who have been more aggressive in expanding operations during this time.
Analysts say the management commentary from India's
Analysts have been critical of the management commentary from India's second biggest IT firm. According to them, Infosys has failed to provide investors with adequate clarity about its near-term prospects and longer-term growth strategy. They say that the company is facing challenges on multiple fronts, including inorganic growth (due to high integration costs), cost efficiency initiatives (due to lack of process optimization efforts), and margin pressure (owing to pricing pressures).
Furthermore, analysts point out that Infosys’ guidance for FY2021 remains conservative and muted compared to other IT peers such as TCS and HCL Tech. They opine that this could be due to the increased caution being taken by management as they assess their plans for the next fiscal year in light of the current uncertain global economic environment. Moreover, there has been a lack of tangible evidence from management regarding how it plans to utilize its large cash reserves amid increasing competition from rivals who are investing heavily in new technologies such as artificial intelligence, machine learning, and automation.
The market's reaction was further exacerbated by news that the board had decided not to pay an interim dividend despite having a healthy balance sheet at the end of Q4FY2020. Analysts believe that this could be indicative of a shift in focus towards internally reinvesting funds instead of rewarding shareholders in the short term. The management's decision not to provide more details on its plans for future investments also raised questions among analysts about their ability to manage capital efficiently going forward.
In conclusion, analysts feel that while Infosys may have strong fundamentals and sound financials overall, it needs more proactive leadership from its board if it wants to retain investor confidence going forward. Furthermore, they suggest that if it wants to remain competitive against rival firms who are rapidly innovating with cutting-edge technology solutions, then it should clearly articulate its long-term strategy for utilizing its resources effectively so as maximize returns for shareholders over time.
Brokerages have reduced their target prices of Infosys by up to 30%.
The recent and dramatic fall in Infosys’ share price has seen brokerages reduce their target prices of the company by up to 30%. This is a significant decrease from the previous targets, with some analysts expressing concerns that the stock may continue to be volatile until the management provides more clarity around its growth plans and strategy.
Brokerage firm Edelweiss downgraded its rating on Infosys shares to 'hold' from 'buy', and reduced its target price to Rs 1,450 from Rs 1,800. CLSA also cut its target price for Infosys by 20% to Rs 1,560 from Rs 1,950, while Motilal Oswal Securities slashed the target price by 25% to Rs 1,440. In addition, UBS reduced its target price of Infosys shares by 17% to Rs 1,550.
The reduction in brokerages' target prices comes as investors fear further deterioration of margins for Indian IT firms due to increasing competition and market uncertainties. The analysts suggest that Infosys should focus on areas such as digital transformation services and cloud-based platforms which could provide better value for clients in this changing business environment. Furthermore, they say that cost efficiency initiatives should be implemented in order to maintain profitability levels even in challenging times. Furthermore, they suggest that any long-term capital expenditure plans should include detailed financial analysis of potential returns on investments in order to maximize returns for shareholders.
It is clear that investors are hoping for a rapid response from the management at Infosys so that they can renew their confidence in its outlook and performance. With increased competition across sectors and a volatile global economic landscape ahead of us, only time will tell if these efforts will pay off or not.
Over 20% discount to TCS
As of Monday, Infosys traded at a 20% discount to Tata Consultancy Services (TCS), India's largest IT firm. This is a significant shift from the usual trend, where both companies have typically traded at a similar valuation for the past five years. Analysts believe that this discount can be attributed to several factors, including lower revenue growth and profitability margins compared to TCS, as well as increasing competition and uncertainty in the global technology market.
The IT sector is facing numerous headwinds due to the Covid-19 pandemic, with rising labor costs and slowing demand from clients. Furthermore, Infosys is being weighed down by its large exposure to Europe and North America markets which are currently struggling more than other regions due to the pandemic. In comparison, TCS has been able to navigate these turbulent conditions better due to its diversified client base and focus on new digital services such as cloud computing and artificial intelligence (AI).
Infosys' underperformance relative to TCS is also compounded by increased cost pressures in terms of wages and employee attrition rate. The company saw employee attrition rise from 18% in FY2019/20 to 20% in Q4 2020/21. This forced them into engaging in expensive hiring practices such as offering higher salaries or signing bonus payments for new employees. Additionally, their decision not pay an interim dividend may have further dampened investor sentiment towards Infosys since it indicates that management isn't sure about how the year ahead will unfold financially for the company.
Analysts suggest that Infosys needs more proactive leadership from its board in order to restore confidence among investors and reverse this discount trend relative to TCS. Cost efficiency initiatives should be implemented quickly while detailed financial analysis of potential returns on investments should also be done immediately in order maximize returns for shareholders going forward.
Kotak Institutional Equities has reduced its revenue growth
Kotak Institutional Equities (KIE) recently reduced its revenue growth estimates for Infosys in FY2021. The research arm of the financial services giant had previously estimated a 5.7% YoY growth in revenues for the IT major, but has now cut this figure to 4.6%. This is significantly lower than the industry average of 8-10% growth and is the lowest rate of revenue expansion since FY2017.
Analysts at KIE attribute this dramatic reduction in revenue growth to increasing competition from other IT majors and increased uncertainty in the global technology market due to Covid-19. Furthermore, they note that Infosys’s employee attrition rate has been higher than peers such as TCS and HCL Technologies, resulting in higher costs for recruitment and training new staff, thus putting further pressure on margins.
KIE also highlights that Infosys’s operating margins have been steadily declining since FY2016-17; currently standing at 18.7%, down from 19.9% last year and 21.8% three years ago. In comparison, TCS’s operating margin stands at 24%, demonstrating how Infosys has become less efficient compared to its peers when it comes to cost management and profitability.
Despite having one of the highest cash reserves among all Indian IT companies, Infosys is struggling with business continuity plans due to these challenging conditions; investors are therefore worried about the long-term prospects of the company given its lacklustre performance over recent quarters and uncertain outlook for future growth. As such, KIE has advised investors to remain cautious with respect to their investments in the stock until there is greater clarity on how management intends to utilize resources more efficiently and maximize returns for shareholders going forward.
0 Comments