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The Infosys stock price is testing the sub-Rs 1,600 level. Where is it headed following the fourth-quarter miss?

On Monday, Infosys shares fell to their lowest level in two years after the IT major’s fourth-quarter results disappointed analysts across the board, resulting in both earnings downgrades and target price reductions.

Morgan Stanley has lowered its FY23 and FY24 earnings per share estimates for Infosys by 2-3%, to Rs 1,970 from Rs 2,050 previously. JPMorgan has lowered its earnings estimates by 5-7 percent and lowered its target price to Rs 2,200 from Rs 2,300 previously. Jefferies reduced its target price to Rs 2,050 from Rs 2,135 citing a 3-6% decline in earnings estimates. CLSA (4-5%) and Nomura India (5-7%) both reduced earnings estimates by 4-7%. While CLSA maintained its target price of Rs 2,040, Nomura reduced it to Rs 2,050 from Rs 2,160.

On Monday, the scrip fell 9% to Rs 1,592.05. On March 23, 2020, the scrip had fallen 11.99% in trading. The scrip had closed 10% lower that day and had risen in the four sessions that followed.

“In 4QFY22, Infosys’ dream run came to a halt as a client-specific situation impacted revenue momentum and, consequently, margins. While demand tailwinds should quickly restore revenue growth – guidance for 13-15 percent constant currency (CC) YoY revenue growth in FY23 exceeded expectations – margin recovery may take time due to persistent supply-side pressures,” CLSA said.

The brokerage said it has reduced its FY23 and FY24 earnings per share forecasts by 5% and 4%, respectively, and believes the earnings reductions will dampen investor sentiment in the near term.

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“However, the stock’s 8% year-to-date underperformance, in our opinion, limits the downside,” it said.

Infosys
Infosys

Kotak Institutional Equities said Infosys disappointed with an across-the-board miss, even after accounting for seasonal weakness in the March quarters.

“The front-ended revenue growth guidance of 13-15 percent impressed, while the timing and quantum mismatch between headwinds and tailwinds necessitated a resetting of the EBIT margin band to 21-23 percent. The net result is a 2-4 percent decline in earnings per share for FY2023-24, which is never a pleasant prospect,” Kotak said, proposing a new target of Rs 1,975.

Emkay Global has reduced its FY23 earnings per share estimate by 7.2% and FY24 earnings per share estimate by 4.9%, in light of the Q4 miss and lower margin guidance.

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“The operating performance shortfall would have a negative impact on the stock in the near term. We maintain our Buy rating with a revised target price of Rs 1,970 at 28 times March 2024 earnings per share, based on broad-based demand, steady market share growth, and strong cash generation,” the company said.

Nomura India said that while Infosys’ FY23 CC revenue guidance of 13-15 percent exceeded Street estimates, its FY23 CC margin guidance of 21-23 percent fell short.

The March quarter results, it said, disappointed on the majority of measures, with revenue growth of 1.2 percent sequentially in constant currency terms falling short of the consensus estimate of 3%, owing in part to a one-off client-specific issue.

Infosys
Infosys

It also noted that the EBIT margin of 21.5 percent fell short of the consensus estimate of 23.2 percent.

Infosys reported a year-on-year revenue growth of 22.7 percent, compared to 15.75 percent for TCS. Similarly, it reported a 12% year-on-year increase in net profit, compared to TCS’s 7.4%.

Margins at Infosys fell 200 basis points sequentially to 21.5 percent in the March quarter, owing primarily to supply-side pressure, increased subcontracting costs, fewer working days, and lower utilisation. Attrition increased to 27.7 percent as a result of a larger base. Digital revenue increased 38.8 percent year over year in constant currency terms and accounted for 59.2 percent of total revenue. The value of large deal wins totaled $2.3 billion.

According to Motilal Oswal Securities, the stock is currently trading at Rs 2,000.

“We anticipate Infosys to deliver margins on the higher end of its guidance range, driven by strong growth and decreased reliance on subcontractors as attrition declines. We anticipate it will be a significant beneficiary of increased IT spending. The stock is currently trading at 25 times FY24 EPS, based on our revised estimates. Motilal Oswal said the stock is valued at 28 times FY24E earnings per share, implying a target price of Rs 2,000.

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