Infosys stock Nomura’s preferred pick post Q4 results; share price may rally 20%

Nomura has raised USD revenues and reduced EBIT margins resulting in a 0-2 per cent decrease in EPS.

Infosys share price has corrected nearly 8 per cent in the last five trading days to Rs 1362.60 apiece on BSE. Even as the IT giant posted a 17 per cent on-year rise in net profit in the January-March quarter, Infosys stock was the top Sensex loser in the very next trading session. Research and brokerage firm Nomura said that the Infosys Q4 results were mixed with a miss on revenues and beat on EBIT margins led by a higher shift to offshoring. The brokerage firm believes that Infosys has potential for industry-leading growth. It has maintained its ‘buy’ rating to the stock and has revised down the target to Rs 1,615 apiece, an upside of nearly 20 per cent. Nomura had a previous target price of Rs 1,620 apiece for the Infosys stock.

Nomura sees Infosys as well placed to beat the top-end of its FY22 revenue growth guidance as strong net new TCV (total contract value) of $940 crore in FY21 and robust pipe. The fourth-quarter EBIT margins were impacted by wage hikes, a rise in subcontractor costs, partly offset by offshoring. The brokerage firm noted that FY22F EBIT margins could be impacted by wage hikes in 2QFY22F, transition cost from the Daimler deal, potential increase in travel costs in 2HFY22F and rising attrition.

Infosys announced an open market buyback of Rs 9,200 crore at a maximum price of Rs 1,750 apiece (25 per cent premium to the current price). “We see two contentions with the buyback, firstly, open market buyback attracts higher tax,” said Rishit Parikh, research analyst at Nomura. In an open market buyback, the company pays 23.3 per cent effective tax on the buyback amount and in addition, the shareholder pays capital gains tax. This is not the case in a tender buyback, Parikh added that a 25 per cent premium does not incentivise the long-term shareholder. “Open market is typically opportunistic and approval for buyback at Rs 1,750 (25 per cent premium) could lead to higher EPS dilution for long term shareholders,” he added.

Nomura has raised USD revenues and reduced EBIT margins resulting in a 0-2 per cent decrease in EPS. It expects a $13.8 per cent USD revenue CAGR and stable EBIT margins 22.8-23.4% over FY22/23F. “We continue to value Infosys on 26x on 1-year forward EPS (up to June-23F) of Rs 62.1 to arrive at a target price of Rs 1,615 (vs 1,620 previously). Infosys also announced its plans to hire 26,000 employees in FY22F vs 21,000 employees in FY21. Of the 26,000 employees, 24,000 will be in India and 2,000 overseas. IT giant guided for a ramp-up in revenues from the Daimler deal to start from the second quarter onwards due to delays given the level of complexity involved in this deal. Based on Nomura’s assumptions, Daimler is likely to contribute 2.4 per cent of revenues in FY22F.

A day before Q4 results, Infosys stock hit a 52-week high of Rs 1,480 apiece. In the previous session, Infosys stock price ended at Rs 1,362.60 apiece, down nearly one per cent.

(The stock recommendations in this story are by the respective research and brokerage firm. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)