Nomura is of the view that the euphoria around Infosys' Q1 results is unwarranted as growth sustainability and margin risks remain for the company. It has maintained its 'Reduce' rating on Infosys BSE -2.17 % but revised its target price upwards. The risk-reward in the stock is unfavourable at current prices, it adds. At 01:50 p.m; the stock was at Rs 2,755. down 1.67 per cent, on the BSE. It touched a high of Rs 2,791.30 and a low of Rs 2,729.05 in trade today. The brokerage remains cautious on the stock on concerns of sustainability of Q1 revenue growth momentum, immigration bill and margins risk.
According to the brokerage, 90 per cent of the incremental growth in Q1 for the company was driven by volatile segments and the demand outlook for these segments remains soft. Margin concerns for Infosys remains as it chases growth in commoditized segments which could result in further pricing pressure, the brokerage says.
"We have turned incrementally negative on margins despite rupee depreciation, on higher-than anticipated wage hikes and pricing declines,"the report said. The passage of Immigration Bill is also likely to impact the stock.
"Even if a bill passes with H1B and L1 salary increases, there could be a jump of 10-15 per cent in US onsite salary cost for visa employees, impacting margins by 160-230bps, in our view. We do not think the H1B salary hikes can be passed on to clients, especially in a scenario of pricing pressure. We do not currently build in these margin impacts in our earnings estimates, but our multiples are lower to factor in this possibility," the report said. According to the brokerage, the risk/reward is unfavourable, as even in a scenario where US immigration bill does not pass the valuation upside is limited, while downside risks remain material if even a diluted immigration bill passes.
"We reiterate our Reduce recommendation, with a revised target price of Rs 2,500 versus Rs 2,120 earlier,"the report said. It prefers HCL Tech and Wipro BSE 1.73 % on par or cheaper valuations and on better earnings growth profile.
According to the brokerage, 90 per cent of the incremental growth in Q1 for the company was driven by volatile segments and the demand outlook for these segments remains soft. Margin concerns for Infosys remains as it chases growth in commoditized segments which could result in further pricing pressure, the brokerage says.
"We have turned incrementally negative on margins despite rupee depreciation, on higher-than anticipated wage hikes and pricing declines,"the report said. The passage of Immigration Bill is also likely to impact the stock.
"Even if a bill passes with H1B and L1 salary increases, there could be a jump of 10-15 per cent in US onsite salary cost for visa employees, impacting margins by 160-230bps, in our view. We do not think the H1B salary hikes can be passed on to clients, especially in a scenario of pricing pressure. We do not currently build in these margin impacts in our earnings estimates, but our multiples are lower to factor in this possibility," the report said. According to the brokerage, the risk/reward is unfavourable, as even in a scenario where US immigration bill does not pass the valuation upside is limited, while downside risks remain material if even a diluted immigration bill passes.
"We reiterate our Reduce recommendation, with a revised target price of Rs 2,500 versus Rs 2,120 earlier,"the report said. It prefers HCL Tech and Wipro BSE 1.73 % on par or cheaper valuations and on better earnings growth profile.
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