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Infosys guidance raise does little to lift stock as margin shock keeps Street worried

Infosys guidance raise does little to lift stock as margin shock keeps Street worried

Infosys guidance raise does little to lift stock as margin shock keeps Street worried
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By CNBCTV18.com Jul 25, 2022 11:42:46 AM IST (Updated)

Infosys share price: The Infosys stock was under pressure on Monday, a day after the Bengaluru-based software exporter reported a quarterly net profit that fell short of Street expectations. Its revenue growth, however, came in ahead of analysts' estimates.

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Infosys shares fell on Monday amid overall weakness in the market, a day after India's second largest software exporter reported a quarterly net profit that fell short of Street estimates. Its revenue growth beat analysts' forecasts and the Bengaluru-based IT giant raised its guidance by 100 basis points, but concerns persist on the Street about its shrinking margin.
Infosys shares were down 0.8 percent at Rs 1,495 apiece on BSE in late morning deals, having declined by as much as Rs 28 or 1.9 percent to Rs 1,478.4 earlier in the day.
Infosys' earnings come at a time when higher employee costs thanks to elevated levels of attrition are eating into the profitability of IT companies, despite rising demand for technology across sectors.
Revenue in constant currency terms — or revenue excluding the impact of forex fluctuations — came in at 5.5 percent on quarter, according to a regulatory filing. That was better than Street estimates as well as its peers TCS, HCL Tech and Wipro.
Analysts in the CNBC-TV18 poll had estimated revenue growth at 4.5-4.7 percent.
Infosys CEO Salil Parekh said the company's strong overall performance amid an uncertain economic environment is "a testament to our innate resilience as an organisation, our industry-leading digital capabilities and continued client-relevance". He said Infosys continues to gain market share.
Attrition at Infosys worsened to 28.4 percent in the April-June period from 27.7 percent in the previous quarter.
The company's management said it continues to optimise various cost levers to drive efficiency in operations.
Infosys reported an EBIT margin — a key metric of operating profitability — of 20.1 percent, down 140 basis points compared with the previous quarter. Analysts had pegged the company's margin at 21 percent. 
The software exporter maintained its margin guidance for the year ending March 2023 at 21-23 percent.
Analysts expect up to 16 percent upside in Infosys shares from Friday's closing price.
Morgan Stanley said the revenue guidance is comforting but not enough to offset its weak margin outlook. The brokerage kept an 'overweight' call on Infosys with a target price of Rs 1,535.
JPMorgan retained an 'overweight' call on Infosys with a target price of Rs 1,700. Calling the company's margin for the April-June period a shock, the brokerage warned of a sharp earnings cut despite silver linings on the revenue guidance front.
Supply challenges drove Infosys' margin guidance to the lower end of its 21-23 percent band.
CLSA continued with a target price of Rs 1,750 for Infosys shares with a 'buy' call.
"Infosys had spectacular numbers. The margin compression can be explained and on a trailing 12 month basis," Moshe Katri, Managing Director of Equity Research at Wedbush Securities, told CNBC-TV18.
"The management is telling us that at this point, despite all the macro (challenges), we're yet to see any slowdown. Unfortunately, given the experience we've had throughout the years, with downturns, we will see some sort of a slowdown down the road. I think the management is telling you that's not happening as we speak," said Katri, who believes Infosys shares look good from an investment perspective.
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