Infy losing sheen as stocks slump further

Infosys shares tumbled nearly 10 per cent, on Friday, its biggest daily fall in two years, after the software exporter forecast lower-than-expected annual sales growth on slower client spending.

Analysts said the Bangalore-based company could lose some of its sheen and narrow its premium gap with rivals Tata Consultancy Services and Wipro due to uncertainty related to top management changes and softening profit margins as a result of wage hikes and currency volatility.

Infosys trades at 19.9 times its forward earnings compared to 24.8 times trailing earnings, while Tata Consultancy trades at 22.8 times its forward earnings. “We believe Infosys’ performance is a company specific issue and we expect better results from TCS and HCL. We don’t see any problem with the overall demand environment in the sector,” said an analyst.

“Overall, we expect changing times for a company that has set standards of organic, steady growth, but has lost bragging rights to TCS and Cognizant off-late,” another added. “Infosys is losing market share to its rivals like TCS and Cognizant due to its premium pricing strategy and as others become more aggressive,” he added. “The management churn will keep revenue growth subdued in the near term.”

Decline in profit margins

Referring to Infosys’ forecast of a nearly three per cent decline in profit margins for this fiscal year, Credit Suisse said this could be the third consecutive year in which Infosys would underperform Tata Consultancy on margins. Infosys had operating margin of 30.2 per cent versus 28.1 per cent for Tata Consultancy and 11.9 per cent for Accenture, as per the latest data from Thomson Reuters StarMine.

CLSA said the planned reorganisation in top management had “lingered on for quite some time” and had been distracting senior employees of the company.

“This protracted exercise has somewhere played a part in Infosys' financial underperformance and could weigh on company performance for another quarter or two,” it said in a note. BNP Paribas said it expected Tata Consultancy and Wipro to report a 4 per cent to 5 per cent dollar revenue growth in the fourth quarter, compared to the third quarter, better than Infosys’ 1 percent growth. It said in a report that it saw Tata Consultancy and Wipro shares as “near-term alternatives” to Infosys.

“Infosys’ previously assumed magical operational excellence is blunting,” CLSA said. “The new structure will also take some time to settle down before the intended objectives come through. Till then, expect a pause in the stock.”

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