Brexit Tremors Hit Again, Infosys Feels the Heat

Brexit had fueled the concerns of adverse affect on Indian Companies over a period. The tremors have begun in just less than two months, and Infosys has been the first to feel the shudder. India’s second largest software company has been scathed after the Royal Bank of Scotland mothballed its plan for Williams and Glyn. W&G was the identity of the separate bank that RBS was planning to open in the UK; for which Infosys was a key technology partner for consulting, application delivery and testing services.

Impact:

The company is said to have lost as much as $50 million and subsequently is said to ramp-down 3,000 employees.

The loss of the contract is going to have an adverse effect on the company’s financials, especially revenue which could be around $ 70-80 million in FY17 and $ 150-200 million in the next financial year. Infosys will have further to revise its revenue guidance, downgrading by 70-80 bps. This downgrading will be the second for this year. In July, Infosys had cut its annual sales outlook citing the weak demand. This had triggered the selloff in the stock.

Quarterly Performance:

This is another headwind after the company disappointed the market with its lower-than-expected quarter performance. The company reported the marginal rise in the consolidated revenue by 1.4%. The revenue for the quarter ending June 2016, stood at Rs. 16,782 crores in comparison to Rs. 16.550 crores in the same quarter for last financial year.

While, the company reported the quarter-on-quarter fall of 4.5% in net profit. The net profit stood at Rs. 3,436 crores as against Rs. 3,597 crores in the last quarter. The company has cut the full year revenue guidance to 10.5-12% in the terms of constant currency. The decline in net profit can be justified by the rising employee cost which was valued at Rs. 9,282 crores this quarter, while it stood at Rs. 9,024 crores in the previous quarter. Also, the depreciation of Rs. 400 crores were added in the total expenditure. Other expenses of the company also increased almost 2.5 folds pulling the net profit down. The EPS and the PAT have been almost flat, marginally slipping. The EPS reported for last quarter was Rs. 15.74, while in the quarter under review, it stands at Rs. 15.03. PAT stood at Rs. 3,438 crores in the June quarter, as compared to Rs. 3,598 in the previous quarter.

Stock Strategy:

Infosys is at its eight months low level. The question that has been haunting the investors is what to do with the stock?

It is a sector that will be taking most heat from the Brexit. Its impact on global economy and corporate earnings is uncertain. Hence, it doesn’t hurt to be a little cautious in the space. The stock has been through the corrections and has been trading at an attractive valuation for those who want to hold on to the stock for long-term.

At CMP of Rs.1051.80 Infosys share price closed at a P/E of 17.58, the market cap of the company is 244061.86 crores.

Remember, large cap IT firms are not so promising for the near-future returns. So, those looking for some quick gains should refrain from Infosys and pay attention to the stocks repaying in short term basis. Infosys, at best, is a good defensive play, like other IT firms.

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