Infosys gains most in one year on revenue guidance, payout plan

Shares of Infosys Ltd on Monday rose as much as 5.5%, gaining the most in the last one year, as the company, post market hours on Friday, reported strong June quarter earnings and increased its revenue growth guidance for fiscal year 2020.

The management said it was also confident of delivering within its guided EBIT margin range of 21-23%, despite recent rupee appreciation, and was expecting to return more cash to its shareholders.

The stock surged as much as 5.49% to hit a high of ?767 a share. At 9.50 am, it was trading at ?758.60 on the BSE, up 4.33% from previous close.

“We believe increased FY20F revenue growth guidance, strong deal win momentum and improved capital allocation policy are positive,” said Nomura Research in a 12 July note.

Infosys result came as a relief for investors especially after the lower-than-expected earnings reported by Tata Consultancy Services Ltd.

Infosys raised its revenue growth guidance for FY20 estimates to 8.5-10% against 7.5-9.5% forecast earlier. The management indicated that strong deal wins and order pipeline were the key reasons for raising revenue growth guidance for the year.

“We believe that while the company’s results print does have a few wrinkles (street’s FY20E EBIT margins at 22.2% continue to be at risk), the revision in annual outlook and strong order intake should help cut the recent under-performance versus TCS. We thereby raise our weights for Infosys in our EAP portfolio. A worsening of global macros and INR appreciation remain key risks,” said Emkay Global in a 12 July note.

On a year-on-year basis, Infosys’ revenue grew 12.4%, which is ahead of TCS even adjusting for inorganic contributions from Stater (70 basis points) and Fluido (10 bps). Infosys reported extremely strong large deal wins of $2.7 billion, including some contribution from Stater, its highest ever, against $1.5 billion over the past two quarters and $1.1 billion in first quarter of FY19.

“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,” said SBI Cap Securities in a 12 July note.

Rise in shares may be limited as Infosys’ attrition rate increased by 40bps year-on-year to 23.4% on a consolidated basis in first quarter of FY20 and is turning alarming. The attrition rate has not settled down despite management efforts such as increasing the employee engagement programme, higher-than-peer increments and performance-based rewards.

Analysts believe that the company is not factoring in the risk of this uncontrolled attrition in its guidance and thus remains a risk to the financial performance.

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