Infosys shares hit record high on strong Q1 earnings. What experts say
Infosys shares today rallied near 7% to a new high of Infosys shares hit record high on strong Q1 earnings. What experts sayover 4% after the IT company started FY20 on a strong note with constant currency revenue growth of 12.4% YoY. The Bengaluru-based IT company also raised its revenue forecast for the year on upbeat demand for digital services. Infosys, lifted the revenue forecast for the fiscal year ending March 2020 to between 8.5% and 10% on constant currency basis as its first quarter net profit beat analysts’ estimates. This compares with its previous guidance of between 7.5% to 9.5%.
Infosys also reported record deal wins of $2.7 billion in the quarter. Infosys posted a net profit of ₹3,802 crore, ahead of analyst expectations of ₹3,612 crore. Infosys maintained its operating margin guidance for 2019-2020 in the range of 21% to 23%.
Some analysts however pointed out to the higher level of attrition in the company. With a churn rate of 23.4%, Infosys said it would hire 18,000 staff from university campuses this year.
Infosys has revised its capital allocation policy upwards to distribute about 85% of free cash flows cumulatively over a 5-year period, from 70% earlier, a move which is positive for the stock, say analysts.
Brokerage Views on Infosys Shares
Reliance Securities: “Attrition remains a bug-bear and this is an area that the IT major needs to focus (on) given major digital talent shortage and attendant margin pressure due to wage cost inflation,” said Harit Shah of Reliance Securities.
Sharekhan: “Infosys has delivered inline revenues, while EBIT margin was above our estimates. On the positive side, TCV wins of $2.7 bn in Q1 on top of $1.56 bn in Q4FY19, broad based growth in industries vertical and strong 42% growth in digital revenue looks promising. On the flip side, elevated attrition numbers continues to remain a sour point for the company. Overall, earnings performance was healthy and increase in revenues guidance to 8.5-10% has positively surprised us. Also, company new stated objective of capital allocation to investors at 85% of Free cash flows vs 75% earlier is quite comforting, we have a BUY rating on the stock with target price of ₹840,” said Sanjeev Hota, AVP Research at Sharekhan, by BNP Paribas.
Motilal Oswal: This brokerage said that Infosys Q1 performance was marginally ahead of expectations and “more significant for valuations was the capital allocation policy change, which will enhance its pre-tax payout yields.” Motilal Oswal, which has a ‘Buy’ on the stock, says the case for narrowing of the valuation gap with TCS gets stronger.
SBI Cap Securities: “Broad-based growth, robust deal intake, growing deal pipeline and continued strong traction in digital inspire confidence that growth challenges are largely behind for the company. The management exudes confidence that margin trajectory will improve in the coming quarters as the specific investment phase to expand digital capabilities and address gaps in the sales engine is largely behind. We believe growth convergence and return of margin stability at Infosys will narrow the valuation discount to TCS over the medium term,”, the brokerage said in a note.