Infosys Q4 Review: Shares Fall Most In Over Two Years As Analysts Cut Margin Estimates

Shares of Infosys Ltd. fell the most in over two years after analysts cut margin estimates as supply-side challenges persist.

The second largest Indian IT company saw its EBIT margin contract to 21.5% in the quarter ended March from 23.5% in the preceding three months. It forecasts operating profit margin at 21-23% for FY23.

Infosys' revenue, however, increased 1.28% sequentially to Rs 32,276 crore in the fourth quarter. The company net added 85,000 employees in FY22.

The company also won deals worth $2.3 billion in the January-March period compared with $2.53 billion in Q3. "It won 25 large deals and these were diversified," said Salil Parekh, managing director and chief executive officer.

Key Q4 Highlights (QoQ)

• Revenue in U.S. dollar terms rose 0.7% to $4,280 million.

• Revenue growth in constant currency terms stood at 1.2%.

• Net profit fell 2.12% to Rs 5,686 crore, against the Rs 5,968-crore forecast.

Infosys' revenue growth for the fiscal ended March stood at 20.3%. It had guided for 19.5-20% revenue growth for FY22. For 2022-23, it expects growth to be at 13-15%.

According to Parekh, the revenue guidance of 13-15% is a "good guidance". Nilanjan Roy, chief financial officer at Infosys, said, "We are comfortable in maintain this band... As we get into discussion with the clients during renewals, we will look at pushing the margins."

Shares of Infosys dropped as much as 9.07% to Rs 1,590 apiece on Monday. That's the worst drop in over two years. The stock ended the day's trade at Rs 1,621.4 apiece, down 7.2%.

Of the 49 analysts tracking the company, 40 recommend a ‘buy’, five suggest a ‘hold’ and four have a ‘sell’ call, according to Bloomberg data. The average of 12-month price targets implies a 24.4% upside.

Here's what brokerages have to say about Infosys' Q4 performance:

• Maintains 'buy' with a target price of Rs 2,050, implying a 17.24% upside potential.

• Infosys' growth in Q4 disappointed even considering the seasonal weakness. Muted growth in its top-2 verticals (BFSI and Retail) and top markets (North America and Europe) and sharp decline in Life Sciences vertical possibly due to one-off contractual issues resulted in the subdued growth performance.

• Large deal bookings in Q4 remained in the $2-2.5 billion range at $2.3 billion, of which c.48% were net new.

• We expect Infosys to grow its revenues at 16%—1% above its upper end of guided range, as it has beaten this by 1-6% every year under the current management.

• We cut our margin estimates by 100-170 bps to factor the miss and expect 21.9% margin in FY22 - slightly below mid-point of guidance range.

• Maintains 'buy' with a target price of Rs 2,050, implying a 17.24% upside potential.

• The company’s FY23F revenue growth guidance of 13-15% YoY in CC (is 100 bp ahead), but EBIT margin band of 21-23% was lower than the Street’s expectation of 22-24%.

• The FY23F revenue guidance of 13-15% YoY appears to not have been materially impacted by the client contract issue in Q4 FY22 (which will likely reverse over a few quarters, according to the company). We forecast 14-16% YoY revenue growth in dollar terms over FY23-24.

• While price hike discussions have started with customers, we think it will take time for margins to reflect any impact of price hikes. We expect FY23F EBIT margin to drop 100 bp YoY to 22%.

• We lower FY22-24F EPS by 5-7% primarily on our lower margin expectations. We expect Infosys’ revenue growth to continue to outpace that of TCS in FY23F.

• Maintains 'buy' with a target price of Rs 2,000 implying a 14% upside potential.

• Infosys posted weak earnings in Q4FY22 with slow growth and a meaningful dip in margin. Though growth in Q4FY22 was muted, demand remains intact and the order book remains strong. The management’s FY23 growth guidance and high headcount addition provide further visibility on demand.

• We expect Infosys to deliver margin on the higher side of its guidance band, with strong growth and reduced dependence on sub-contractors as attrition falls.

• We expect Infosys to be a key beneficiary of an acceleration in IT spends. Based on our revised estimates, the stock is currently trading at 25x FY24 EPS.

• Maintains 'buy' with a target price of Rs 1,970 implying a 12.7% upside potential.

• Revenues grew by a mere 1.2% QoQ CC, while EBIT margin declined 190 bps to 21.6%. Operating performance remained weak due to seasonality, a Covid-related impact in the early part of the quarter and a client- related contractual provision (likely to be recovered in FY23).

• Infosys has guided for 13-15% YoY CC growth in FY23, implying a 2.7-3.4% CQGR. EBITM is expected to be within the 21-23% range.

• We cut FY23/FY24 estimates by 7.2%/4.9%, factoring in the Q4 miss and lower margin guidance. The operating performance miss would weigh on the stock in the near term.

• Maintains 'buy' at a target price of Rs 2,040, implying a potential upside of 17.2%.

• Infosys’ dream run took a pause in Q4 as a client-specific situation affected the revenue momentum, and thereby margins.

• While demand tailwinds should bring the revenue growth back on track soon – 13-15% constant currency year-on-year revenue growth guidance for FY23 was ahead of expectations – margin recovery may take time given persistent supply-side pressures.

• The consequent reset in estimates could dampen investor sentiment in the near term. However, the stock’s 8% year-to-date underperformance limits the downside, in its view.

• Infosys’ position as the best scale services play on digital adoption remains intact given its best-among-peers organic revenue growth momentum. Infosys is part of the CLSA India Focus portfolio.

• Maintains 'overweight' at a target price of Rs 1,970, implying a potential upside of 13%.

• Post a weaker-than-expected Q4 performance and negative surprise on FY23 margin guidance, street earnings-per-share estimates will come down.

• Morgan Stanley says it would use any correction as a buying opportunity as Infosys' growth momentum should remain strong, supported by both very strong management commentary on demand and aggressive hiring.

• While FY23 margin decline will be an industry-wide phenomenon, on an incremental basis, attrition rates are coming down and pricing commentary is constructive and bodes well.