India’s second-biggest IT service provider Infosys’ net profit rose 12 per cent to Rs 5,686 crore for the quarter ended March from Rs 5,076 crore in the year-ago period while its revenue grew nearly 23 per cent to Rs 32,276 crore as compared to Rs 26,311 crore year-on-year (YoY). Infosys has projected 13-15 per cent revenue growth for the current fiscal amid a robust deal pipeline and continued demand for digital and cloud computing services. The company has operating margin guidance of 21 per cent-23 per cent for FY23.
Infosys Outperforms TCS
Prima facie, Infosys’ numbers managed to beat those of TCS for another quarter. For the last few quarters, the trend has been the same. Infosys said its revenue growth was 22.7 per cent year-on-year compared to 15.75 per cent for TCS. Similarly, it reported a 12 per cent year-on-year rise in net profit, compared to 7.4 per cent for TCS. The company said its board has recommended a final dividend of Rs 16 per share. Together with the interim dividend of Rs 15 per share already paid, the total dividend per share for FY22 would amount to Rs 31, which is a 14.8 per cent increase over FY21.
Infosys trades at a 10 per cent discount to TCS, despite having a 2 per cent higher earnings growth outlook, highlighted global brokerage Jefferies. “While we expect the stock to correct post Q4 results, we note that since FY20, whenever Infosys trades at a 10 per cent discount to TCS, its stock has outperformed TCS by 10 per cent in the following 12 months,” the note added.
Jefferies has maintained its ‘Buy’ tag on Infosys shares with a revised target price of Rs 2,050 on a strong growth outlook even as Infosys’ Q4 results missed estimates.
On why the Q4 numbers have trailed the street’s expectations, Infosys CEO Salil Parekh told reporters in a briefing that while there has been a strong volume growth in the quarter, there was an issue with a client related to a contract situation.
“Though growth in 4QFY22 was muted, demand remains intact and the order book remains strong. The management’s FY23 growth guidance and high headcount addition provide further visibility on-demand,” as per domestic brokerage Motilal Oswal which has a Buy rating on the IT stock with a target price of Rs 2,000 per share.
Analysts at brokerage Emkay believe that the operating performance miss would weigh on the stock in the near term. It has maintained Buy with a revised target price of Rs 1,970, considering broad-based demand, steady market share gain and robust cash generation.
While the relative defensiveness that the IT sector boasts of is sustained, HSBC’s equity strategists recommend a reduced sector weighting. The global research firm has affirmed a hold rating for TCS, downgraded Infosys to hold from buy and cut target prices, saying that weakness in the rupee is an upside risk to the stocks.
“We downgrade Infosys to Hold on lower potential market share gains in FY23e, a downward risk to profitability, and limited upside to growth estimates; cut TP (target price) to Rs 2,040 from Rs 2,225. Maintain Hold on TCS and cut TP to Rs 3,760 from Rs 4,310.”
The export-oriented Indian IT sector typically stands to gain from a weaker exchange rate, with a large component of big firms’ earnings being in US dollars.
While the IT sector remains relatively attractive, the research firm believes that at a time when valuations are “not undemanding”, the little upside potential for growth and the downside risk to margins constrain the room for IT stocks to head higher, the brokerage noted.
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