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Infosys may face headwinds on wage hike, debt provisioning

Infosys reported a 10.51% rise in net profit for the fourth quarter at Rs 4,078 crore

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Tata Consultancy Services (TCS) and Infosys posted a strong earnings growth, kicking off the fourth quarter earnings season, but Infosys's growth guidance has been lowered for fiscal year 2020.

In post earnings research note, broking firm Emkay Global Financial Services said that Infosys's 2.1% quarter-on-quarter (qoq) constant currency (CC) growth for the fourth quarter of fiscal 2019 was in line with expectations of 2%.

Earnings before interest and taxes (EBIT) margins of 21.4% was down nearly 110 bps qoq. For the full-year 2019, Infosys posted 9% CC growth against guidance of 8.5-9%, while earnings EBIT margins declined 150 bps year on year (yoy) to 22.8%. The IT giant provided modest CC growth guidance of 7.5-9.5% and lowered its margin guidance band by 100 bps to 21-23% for FY20E.

"Going ahead, Infosys expects headwinds in the form of wage hikes in H1FY20 and normalisation of bad debt provisioning, which makes us believe that Infosys's margins should remain near to the lower end of its 21-23% guidance band for FY20. On the growth front, the guidance also includes the contribution of inorganic acquisitions announced till date (approx 1% of FY20E sales as per our calculations), leading to an implied organic CC guidance of 6.5-8.5%. Infosys attributed the company-specific challenges in its manufacturing (Europe), insurance and healthcare verticals for the modest growth guidance," Emkay said.

Infosys reported a consolidated revenue grow of 19.1% to Rs 21,539 crore in Q4FY19 with a net profit of Rs 4,078 crore, an increase of 10.51% over the corresponding period last year. However, on an annual basis, Infosys net profit decreased 3.86% to Rs 15,410 crore, despite an increase of 17.23% in its revenue to Rs 82,675 crore.

TCS revenue, on the other hand, grew 18.5% yoy to Rs 38,010 crore, while net profit grew 17.7% to Rs 8,152 crore. For the year ended March 2019, TCS reported 18.97% growth in its revenue to Rs 146,463 crore, while net profit rose 21.95% to Rs 31,562 crore.

Phillip Capital in a research report said that Infosys reported mix set of numbers in Q4FY19 with strong revenue growth but margins below expectations.

"While the growth parameters ticked all the boxes (digital business growing by 38% yoy, strong deal flow of $1.6 billion growing by 73% yoy) – all this growth appears to be coming at the cost of profitability. The lowering of margin guidance for FY20 (from 22-24% for FY19 to 21-23% in FY20) points to continued pressure that Infosys faces in matching TCS in growth. At the same time, the persistent headache of high attrition shows no signs of going away, anytime soon. Overall, Infosys is sacrificing its margins significantly, and is still not able to match TCS on growth – which the latter appears to be doing it easily, without compromising profitability, on almost twice the base. We believe the growth (relative) and margin concerns will continue to haunt Infosys in near to medium term – leaving little room for upside," the report said.

However, Phillip Capital in its report on TCS indicated that the company is expected to report a single-digit growth for both revenue and profit in the current financial year. The revenue growth for fiscal 2020 is estimated at 8.9%, while net profit is expected to grow at 8.5%.

DIFFICULT CODE

  • Infosys reported a 10.51% rise in net profit for the fourth quarter at Rs 4,078 crore
     
  • On an annual basis, the company’s net profit fell 3.86% to Rs 15,410 crore 
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