Coronavirus clouds Infy's prospects; firm suspends guidance over pressure

A stable operating margin in the March 2020 quarter (Q4) by Tata Consultancy Services, and the firms’ expectations of recovery by the December quarter, announced last Thursday,  had revived investor sentiment towards IT stocks to some extent.

However, Infosys, on Monday not only reported lower-than-expected numbers for Q4, but also indicated there is limited clarity on business recovery, a key reason why it skipped providing future guidance. This rubbed off negatively on the entire IT sector. The Nifty IT Index and Infosys’ stock shed 3-3.4 per cent on Tuesday. The overall market was also bearish on Tuesday (Sensex was down 3.2 per cent).

Infosys’ rupee revenue grew 8 per cent year-on-year (YoY) to Rs 23,267 crore, missing Bloomberg estimates of Rs 23,460 crore, but profit before tax (up 4 per cent) of Rs 5,496 crore was way below expectations of Rs 5,812 crore. In constant currency terms, revenue fell by 0.8 per cent sequentially, versus expectations of a 0.5 per cent increase. Net profit (before minority interest) grew 6.3 per cent to Rs 4,335 crore, and was a tad better than estimates because of lower income tax.

 

 

Notably, the company, for the first time, suspended its revenue and margin guidance due to uncertainty emanating from Covid-19. According to Amit Chandra, analyst at HDFC Securities: “Not giving or suspending guidance shows greater business uncertainty.” How the deal-wins ramp up going ahead after the September 2020 quarter would be key,” he added.

Q4 results also indicate the quantum of pain Infosys is witnessing due to the Covid-19 pandemic. Key geographies of North America and Europe, which account for around 85 per cent of Infosys’ revenues, grew between 5 per cent and 6.4 per cent YoY in reported terms, much lower than 9-10 per cent growth clocked in the December 2019 quarter. Among key business segments, financial services (31-32 per cent of revenues) grew at a lower rate of 3.5 per cent YoY compared to 5.3 per cent a quarter ago. Barring retail, all the other segments witnessed a deceleration in YoY growth in Q4. Impact of expected pricing pressure on margin would be a key monitorable going ahead.

Infosys' management said most key business segments would remain under pressure in the near term and the execution of deal wins would also be a concern. While long-term growth potential remains intact in areas, such as digital and cloud, it said the current crisis is different from the earlier financial crisis. 

Some analysts thus expect Infosys’ revenues to decline between 4 per cent and 5 per cent sequentially in the June 2020 quarter. For FY21, many analysts estimate around 5 per decline Infosys’ profit.