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TREND: Growth guidance in pandemic times endears Infosys to investors

Cogencis, Thursday, Jul 16

By Nikita Periwal

MUMBAI – Infosys Ltd forecasting growth in a year when even clairvoyants would be reluctant to, appears to have caught investor fancy and has led most analysts to revisit their estimates to pencil in higher earnings.

The company said it expects sales in the current financial year to grow 2% at best and stay flat at the least, at a time when most expected sales to struggle as customers cut spending due to the COVID-19 pandemic.

The company's forecast comes on the back of an expectation beating sales and net profit in Apr-Jun which saw the company continuing to reap the benefits of localisation, enhanced digital competencies, institutionalising the large deals process and building capability in areas such as business process outsourcing.

Infosys, in fact, could be the only player of that scale to report a growth for the year, dealers quoted a CLSA Asia Pacific Markets report as saying.

The guidance implies Infosys will have to see a sequential sales growth of 0.5-2.0% through rest of the quarters this year. This seems "reasonable" given the recently struck mega-deal with Vanguard, robust deal wins and a healthy pipeline for digital deals, brokerage Kotak Institutional Equities said.   

This optimism reflected in shares of Infosys, which hit a lifetime high of 955.50 rupees on the National Stock Exchange earlier today, with gains backed by higher-than-average volumes.

For a company whose profitability has been dwindling by about 90-100 basis points each year in the last four-five years, Infosys maintaining its profitability range at 21-23% has also come as a positive surprise for investors.

While most technology companies will cut discretionary spends and defer wage hikes, Infosys will have the additional benefit of a fall in attrition leading to lower on-boarding and hiring costs. Not only will this narrow the gap in operating margins with peer Tata Consultancy Services, but also lead to a re-rating of the stock, analysts said.

While many companies have reported higher deal wins when compared with the previous year, Infosys has been able to do it on a sequential basis as well. In that lies the endorsement of the company's overhaul of internal processes and strategy, analysts said.

With five of the 15 deals signed during the quarter coming from financial companies, its biggest sales contributor, the company has effectively silenced critics of its tardy sales efforts. The deal with Vanguard, the largest for the company, will also see 1,300 employees of the company move to Infosys.   

Infosys is also relatively less exposed to troubled sectors such as retail, transportation and hospitality compared with TCS, and has higher exposure to high-tech clients like Apple and Microsoft, which are continuing to invest through the COVID-19 led downturn.

This could lead to Infosys again outpacing TCS in sales in the current year to March, this time by 400-500 basis points, leading to a higher earnings multiple vis-a-vis the bellwether software company from the Tata group, Nirmal Bang Institutional Equities said.  

This expectation of industry-leading sales growth has led to most analysts assigning a higher earnings multiple to Infosys, with target prices implying an upside of 4-18% from the current levels. 

At 1329 IST, shares of Infosys were up nearly 10% at 912.55 rupees on the National Stock Exchange. As JP Morgan puts it, Infosys has knocked the June quarter "out of the park".  End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Krishnadevann Vijayaraghavan

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