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Infosys' tepid guidance for this fiscal likely to hit investor enthusiasm

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ET Intelligence Group: IT bellwether Infosys expects to retain growth in dollar-denominated revenue for the current fiscal between 7 per cent and 9 per cent compared with the 7.2 per cent growth in FY18.

Keeping the currency rates constant, the growth is expected to be 6-8 per cent. While it reflects that the company is less likely to report deceleration after the change in leadership a quarter ago, this alone may not enthuse investors much.

That’s because its guidance also means the country’s second largest software exporter may not be able to beat a rather modest average growth target of 7-9 per cent given by the sector agency Nasscom. In addition, the tepid guidance by Infosys stokes concerns whether the company will report lower growth than its larger peer Tata Consultancy Services (TCS) for the second consecutive fiscal.

After lagging behind Infosys for two fiscals to FY17, TCS is expected to report better growth for FY18 when it declares the March 2018 results on April 19. The lower target band for operating margin will be another factor that may disappoint investors.

While reporting the fourth quarter numbers on Friday, Infosys reduced its target margin band to 22-24 per cent from 23-25 per cent earlier.

This was on account of higher investment in new technologies, according to the management. What may offer some relief to shareholders is the company’s intent to return more cash to them.

Apart from its policy to return 70 per cent of the free cash flow (annual cash flow after allocating for capital expenditure), Infosys plans to give a special dividend of Rs 10 per share over and above the final dividend of Rs 20.5.

This will take the total dividend for FY18 to Rs 43.5 per share.

Dividend payout for FY18 was 30 per cent higher than that in the previous year, excluding the special dividend.

It also plans to return up to Rs 10,400 crore to shareholders in FY19.

At March-end, the company had cash, equivalents, and current investments worth Rs 26,225 crore. On the operational front, the company continued to report traction in digital revenue, which grew by 3.6 per cent sequentially in the March quarter.

That’s crucial for the longterm growth since the digital revenue for the sector is growing faster than the revenue from the traditional application development and maintenance projects.

Also, the company’s intent to invest a portion of its operating profit in new platforms augurs well. At the Friday’s closing price of Rs 1,169, the company’s stock was traded at 16 times FY18 earnings.

This is a significant discount to the trailing price-earnings multiple of 23.6 for TCS.




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