Demand worries may sting Infosys shrs another 2 qtrs

Informist, Friday, Aug 4, 2023

By Reshab Shaw and Padmini Dhruvaraj

BENGALURU/MUMBAI - Equity investors may keep shunning shares of Infosys Ltd as demand issues that have plagued the company over the last few quarters are showing no signs of abating.

The shares of Infosys have declined about 10% so far in 2023, and have underperformed those of other information technology players. Its rivals in the Nifty IT pack--Wipro Ltd, Tata Consultancy Services Ltd, HCL Technologies Ltd, and Tech Mahindra Ltd--have advanced 4-16% in the same period.

The Infosys stock is likely to remain under pressure for at least two more quarters, in the backdrop of the company having reduced its revenue guidance twice within three months, citing weak demand.

A spate of resignations at high-level management positions at the information technology major over the past few months has only complicated the matter.

"Share price (movement) is largely linked to guidance cut because they have flip-flopped twice and that is where the issue lies," said Dipesh Mehta, a senior research analyst at Emkay Global Financial Services.

"We expect the stock (Infosys) to remain flat or consolidate a bit over the next 3–6 months, given that the overall macro demand environment for discretionary IT spend continues to remain soft," said Sumeet Jain, an IT analyst from ICICI Securities.

Within this soft discretionary demand environment, Infosys is likely losing market share, given its muted growth guidance for 2023-24 (Apr-Mar), Jain believes.

In times such as now, when demand is weak and fears of recession in the developed economies loom large, it is natural for the earnings of the IT companies to shrink. But Infosys is seen to be affected more in this shared problem, majorly due to its higher reliance on clients' discretionary projects.

"The discretionary portion is greater for Infosys than a TCS or an HCL Tech," said Nishit Master, a portfolio manager at Axis Securities, explaining why Infosys has underperformed its peers.

Jain, too, had a similar view. "They (Infosys) have won some vendor consolidation deals like the Danske Bank deal but then apparently they have a very high exposure to discretionary projects and those are getting delayed...so that is hurting Infosys quite a lot," he said.

In Apr-Jun, Infosys' revenue from financial services--its largest vertical--declined 0.8% sequentially to 28.1%, while those of HCL Technologies rose 1.4% to 22.6% during the quarter. The BFSI vertical of TCS also saw a 0.4% sequential decline to 31%. Meanwhile, Infosys’ revenue from retail vertical fell 0.3% to 14.5%, while those of TCS and HCL Technologies rose 0.1%, each.

The company’s Chief Executive Officer and Managing Director Salil Parekh also noted at a recent press conference that the company was facing a double whammy of lower volumes in transformation projects and slower decision-making by clients.

As a result, the IT major was forced to cut its sales growth guidance to 1.0-3.5% from 3.0-7.0% for the financial year 2023-24 (Apr-Mar), signalling that it may significantly underperform the broader market growth. In July 2022, Infosys had estimated 2022-23 revenue to be in the range of 14-16%.

Meanwhile, Infosys’ next biggest rival HCL Technologies has maintained its revenue growth guidance of 6-8% for 2023-24. And according to Jain from ICICI Securities, it can be assumed that TCS will grow somewhere between Infosys and HCL Tech. Therefore, it indicates that "Infosys is clearly losing out market share to its competition," he added.

The guidance cut also resulted in a downgrade of the company’s earnings estimates and valuations as investors questioned the company's ability to maintain growth amid the turbulent market conditions.

Infosys shares are trading at around 20 times its price-to-earnings multiple for 2024-25, while bigger rival TCS is trading around 24 times. Even a much smaller rival, LTIMindtree Ltd, is trading at 24 times its price-to-earnings multiple for 2024-25.

"So since 2001, this (growth guidance) is like the worst performance of Infosys ever," Jain said. "So then why do you want to pay them the last 15-year average multiple?... which is what the stock is currently trading at."

The stock has fallen about 5% since Jul 20, a day after Infosys cut its guidance for the full year 2023-24, till Thursday. At 1340 IST, shares of Infosys traded 1.2% higher at 1,380.35 rupees on the National Stock Exchange.

CHANGE IN GUARD

Adding to the challenges, senior-level exits in the past couple of quarters have raised concern about the company's stability and its ability to handle key verticals efficiently, which in return is also contributing to the stock's underperformance, noted analysts.

"To some extent, leadership change has affected the stock, and the company has lost a few people at the top to competition," Master said.

Echoing a similar thought, Chirag Kachhadiya, a research analyst at Ashika Stock Broking Ltd, said: "While revenue-related concerns are common across all other IT large-cap companies, leadership-related concerns are weighing Infosys down."

The resignations have drawn significant attention because most of the departing executives had been with Infosys for nearly two decades, establishing them as veteran employees with extensive experience and knowledge.

Mohit Joshi resigned as president of the company in March, while Ravi Kumar S. resigned from the post of president in October. Both of them have since joined as Chief Executive Officers of Tech Mahindra and Cognizant, respectively.

Additionally, Kapil Jain, the executive vice president, global head of sales and enterprise capability in Infosys BPM, resigned in April to become the chief executive officer of eClerx.

In March, another leader Gopikrishnan Konnanath, a senior vice president and global head of engineering services and blockchain, resigned and joined Cybage Software as its president.

More recently, Narsimha Rao, the executive vice president and co-head of cloud and infrastructure, stepped down. Media reports also suggest that Vishal Salvi, the head of cyber-security, also put in his papers in June.

The sudden surge of high-level departures has captured the interest of industry observers, although the specific reasons behind these exits still remains speculative. Some insiders suggest that a desire for the CEO title might have motivated some executives to explore opportunities elsewhere.

However, despite these headwinds, experts remained optimistic about Infosys' long-term growth prospects. The company's historic outperformance over other IT stocks instilled confidence that its current underperformance might not be as severe as feared.

Jain listed out two events which could potentially lead Infosys out of the woods. He said in the likely event of a double-digit growth visibility or the company winning some large deals, the stock prices could rally. "But the visibility of that is at least 2–3 quarters away," Jain said.

Today, shares of TCS closed 1.3% higher at 3,443.55 rupees on the National Stock Exchange, while Infosys closed 1% higher at 1,378.35 rupees, HCL Technologies closed 1.7% higher at 1,144.35 rupees, Wipro ended 2.3% higher at 408.85 rupees and Tech Mahindra closed 2.8% higher at 1,175.20 rupees. End

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

Edited by Akul Nishant Akhoury

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com