Infosys (INFY): Spending Cuts & Soft Margins Raise Concerns

On Nov 29, we issued an updated research report on premium technology services and consulting firm Infosys Limited (NYSE:INFY) .

In the past three months, Infosys’ shares have recorded an average return of -8.6%, comparing unfavorably with that of the Zacks categorized Service Market industry average of 4.3%. The company has a dull earnings surprise history for the four trailing quarters, with earnings meeting estimates thrice and missing the mark once.

Further, Infosys’ earnings estimates have moved south over the past couple of months. The company has seen 10 downward estimate revisions compared to just one upward, over the past 60 days. This has sent the Zacks Consensus Estimate for fiscal 2017 earnings down from 95 cents to 93 cents per share, which indicates bearish analyst sentiment for the stock.

Headwinds Galore

Of late, Infosys has been grappling with a host of macroeconomic issues that has severely marred its prospects. Persistent decline in the growth rate of IT purchases due to the global economic slowdown and weaker banking business have been a major spoilsport. Though the company has been leveraging its big data capabilities to boost market share, declining demand in the traditional IT technologies has been weighing on its financials.

Also, slower project ramp-ups in large deals are adding to Infosys’ woes. On account of strong macroeconomic headwinds, the company has lowered its guidance for revenue growth this fiscal to 8%−9%, from the previous 10%−11.5%. In addition, the recent U.S. election results are expected to exert pressure on the company’s margins.

Meanwhile, President-elect Donald Trump’s anti-immigration stance is likely to jinx Infosys’ plans to send low-cost developers to work on big tech projects in the U.S. Though the extent of this impact is yet to be determined, Infosys is likely to face the brunt as major Western clients might curtail spending further. This apart, a highly competitive and rapidly changing market poses concern for Inosys.

The company foresees intensified competition from established IT peers as well as new competitors. In particular, Infosys expects increased competition from firms that are strengthening their offshore presence in India or other low-cost locations, as well as from firms in market segments that Infosys has recently entered.

Catalysts to Fight Pressure

Despite these weaknesses, Infosys’ “Renew New” program which lays the blueprint of its long-term growth, has helped it combat these headwinds and propel growth. This program has helped the company reap multiple benefits including the renewal of traditional services, winning of deals, introduction of services, monetization from key initiatives such as Zero Distance and improvement of employee engagement and so on.

Also, Infosys remains bullish that rapid market traction of its AiKiDo offerings (the acronym for Artificial Intelligence, Knowledge-based IT and Design thinking) will prove conducive to top-line performance in the upcoming quarters. For instance, during first-quarter fiscal 2017, Infosys launched Mana – a knowledge-based AI platform – which helps clients renew their core businesses. This platform is successfully attracting new clients.

Moreover, the Zacks Rank #3 (Hold) company’s proactive investments in innovative entrepreneurial ventures are expected to boost its core businesses and help expand market share.

Stocks to Consider

Some better-ranked stocks in the same space include Barracuda Networks, Inc. (NYSE:CUDA) , Amdocs Limited (NASDAQ:DOX) and CDK Global, Inc. (NASDAQ:CDK) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Barracuda Networks is a CA-based security and storage solutions provider. The company has a striking earnings surprise history over the trailing four quarters, having beaten estimates in each of them, for a remarkable average of 525%.

Amdocs Limited is a leading provider of customer care, billing and order management systems for communications and Internet services. The company has a decent earnings history, with an average positive surprise of 2.8% over the trailing four quarters.

CDK Global provides integrated information technology and digital marketing solutions to the automotive retail industry. The company has an impressive earnings surprise history over the trailing four quarters, beating estimates all through for an average of 9.2%.

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