ECONOMY

Infosys Q1 Review: Brokerages Stay Bullish Despite Margin, Attrition Woes

Most brokerages remained bullish on Infosys Ltd. after the first quarter results, citing growth across verticals and geographies, healthy deal traction and rising client spends towards digital services.

The information technology company saw its revenue rise 6% over the preceding quarter to Rs 27,896 crore in the three months ended June. IT even raised its FY22 constant currency growth guidance to 14-16% from 12-14%, according to its exchange filing.

Infosys’ margin contracted during the quarter because of wage hikes. But the company maintained its operating margin forecast for the ongoing fiscal at 22-24%.

The company plans to hire around 35,000 freshers in FY22. “As the demand for digital talent explodes, rising attrition in the industry poses a near-term challenge,” said Pravin Rao, chief operating officer at Infosys.

Analysts, too, highlighted supply-side pressure on margin and high attrition as major concerns for the company, besides rupee appreciation, regulatory concerns around H-1B visas, among others.

Shares of Infosys slipped 0.22% to Rs 1,573.50 apiece around 9:20 a.m. on Thursday. Of the 49 analysts tracking the Bengaluru-based IT company, 43 recommend a ‘buy’, and three each suggest a ‘hold’ and a ‘sell’, according to Bloomberg data.

Infosys’ stock has gained 6.62% over the last month, and nearly 25% so far this year.

Here’s what analysts have to say about Infosys’ June-quarter results…

CLSA

  • Maintains ‘buy’ with a 12-month price target of Rs 1,900 apiece.

  • Rising fulfilment costs weigh on an otherwise buoyant outlook.

  • Expects margin pressure in Q1FY22 to be a near-term irritant than a structural concern.

  • Infosys remains the preferred play due to growing digital spending and market share gains.

  • Infosys continues to remain part of CLSA India focus buy list.

  • Ongoing share buyback to lend downside support.

Dolat Analytics & Research

  • Retains ‘reduce’ with a target price of Rs 1,570 apiece.

  • Revenue growth momentum driven by strong execution across verticals.

  • Strong Q1 earnings led to upgrade in growth guidance for FY22 by 200 basis points.

  • Pipeline remains strong as clients continue to focus on digital transformation, cost take-outs and captive monetisation.

  • Upgrades growth estimates by 22.8% in FY22 due to robust TCV wins, anticipation of continued strong performance, confident commentary and upgrade in guidance.

  • Revenue growth estimates scaled up by 2.8%/3.6% for FY22/FY23E, respectively.

  • Expects sequential growth of 3% in U.S. dollar revenue in Q2 owing to estimated strong performance across verticals, healthy deal traction and pipeline due to higher client spends towards digital transformation.

  • Infosys and other tier-1 IT companies would continue to deliver strong revenue momentum over the next four-six quarters.

  • Current valuations of 25x-30x implying over 2x-2.5x on PEG basis to be sustainable.

Key Risks

  • Contraction of 81bps QoQ in operating profit margin due to supply-side impact that negated gains from improved utilisation, offshore shift and forex gains.

  • Most of the gains likely to get negated due to lower operating profit margin assumption.

  • Margin concerns likely to extend in coming quarters given the upcoming headwinds in the form of wage hike, promotions, recovery in discretionary spends and the need for lateral hiring.

  • Sees limited scope for operating profit margin recovery.

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