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Foresee yet another year of modest earnings growth
* Infosys’ 2.1% qoq CC growth for Q4FY19 was in line with our expectations of 2.0%. EBIT margins of 21.4% was down ~110bps qoq. For the full-year FY19, Infosys posted 9.0% CC growth vs. guidance of 8.5-9.0%, while EBIT margins declined 150bps yoy to 22.8%.
* Infosys provided modest CC growth guidance of 7.5-9.5% and lowered its margin guidance band by 100bps to 21-23% for FY20E. Ex-contribution from its Stater/other acquisitions, the implied organic growth guidance would stand at 6.5-8.5%.
* Modest growth guidance and unexciting exit to FY19 in terms of EBIT margins (with impending wage hikes in H1FY20) should come as a disappointment to the Street. We believe this should lead to at least 6-7% cut in the Street’s earnings estimates for FY20/21.
* Although the ongoing buyback can support the share price (~USD1bn buyback still remaining), the stock may underperform until it shows profitable growth. Retain our Sell rating with a TP of Rs630 (valued at 15x on FY21E EPS; a 25% discount to TCS’ multiple).
EBIT margins slide further to a new low; guidance implies no ‘momentum’
Infosys’ Q4 margins declined 110bps qoq on lower utilization (-70bps), re-badging in large deals (-40bps), planned investments (-30bps), and INR appreciation (-30bps). Margins were, however, supported by lower bad debt provisioning (+40bps) and absence of one-offs in the quarter (+30bps). Going ahead, Infosys expects headwinds in the form of wage hikes in H1FY20 and normalization of bad debt provisioning, which makes us believe that Infosys’ margins should remain near to the lower end of its 21-23% guidance band for FY20 (~100bps lower than Street’s expectations). On the growth front, it has provided 7.5-9.5% revenue growth guidance (again lower than the Street’s expectations of 8-10%). The guidance also includes the contribution of inorganic acquisitions announced till date (~1.0% of FY20E sales as per our calculations), leading to an implied organic CC guidance of 6.5-8.5%. Infosys attributed the company-specific challenges in its Manufacturing (Europe), Insurance and Healthcare verticals for the modest growth guidance. Note that TCS did not indicate any such challenges.
Earnings underperformance continues; outlook and valuations
Infosys’ underperformance continues; it should see flat CC earnings over FY18-20E vs. TCS, whose earnings is expected to grow ~13% in CC terms over FY18-20E. The modest financial performance and unexciting outlook mean a valuation discount over TCS and it should further widen to 25% from the current levels of ~10%. We maintain our Sell rating on the stock with a target price of Rs630 (based on 16x FY21E EPS). Note: Worsening in the macro-situation in US and further impact on currency from Brexit remain key risk to our estimate and view.
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